Beware of Rising Interest Rates: Navigating the Challenges of Variable Rate Mortgages

Hold on as long as you can and keep your monthly payments within bearable limits. Or try to renegotiate your loan by extending its maturity, knowing that in the long term, this will always result in a drain on the overall interest. Households who have taken out a variable rate mortgage are going through a complicated period.

Because while it is true that these same families have benefited so far from lower interest rates than those who had chosen fixed rate mortgages, the rise in rates over the past twelve months has been violent and painful for their wallet. There are those who criticize the monetary policy deemed too restrictive by the European Central Bank in an anti-inflationary key, but there are also those, and there are many on social networks, who accuse the banks, deemed incapable of advising the better those who obviously could not afford an increase in the monthly payment, and therefore a variable rate. There are many voices asking banks to agree to renegotiate mortgages, which the Italian Banking Association (ABI) has already done, but which, according to European standards, is only possible for those who are not not late in their payments.

A mortgage with even one outstanding term is already considered impaired. “There are almost a million Italian families who have difficulty paying the installments of mortgage loans for the purchase of homes: we are talking, overall, of arrears of around 6.8 billion euros”, underlined the secretary general of the banking union Fabi, Lando Maria Sileoni, who was speaking yesterday at La7 -To give some details, these are 2.7 billion non-performing loans, 3.4 billion probable defaults and 620 million late maturities. A large part of these problems relate to variable rate mortgages”, the amounts of which “have increased by up to 70-75% due to the increase in the cost of money decided by the European Central Bank”.

The report presented yesterday by the Abf, the Banking and Financial Arbitrator, shows that, if in general the complaints addressed to the Bank of Italy by the customers of banks and financial companies have decreased in 2022, in the first months of 2023 those that specifically concern requests for renegotiation of variable rate mortgages, linked to the increase in interest rates, have increased “significantly”. “About the difficulties of paying mortgage installments due to the increase in rates, which often affect young people, a dialogue has been opened with consumer associations to define common lines of action”, underlined Antonella Magliocco, responsible of the Bank of Italy’s customer protection department. In total, Via Nazionale received more than 9,200 reports on the behavior of banks and financial operators audited last year, a decrease of 6% compared to the previous year, but this figure remains higher than that of the five years before the pandemic. On Wednesday, it was the president of the Italian Banking Association, Antonio Patuelli, who underlined the willingness of banks to renegotiate mortgages, also calling for “changing the rigid, too rigid rules” of the EBA (the banking authority European Union) “for those who are late in paying their installments”, delays which do not allow banks to be more flexible. About a third of mortgages granted in Italy, a 425 billion euro stock market, are variable rate, but of mortgages granted in the second quarter of this year the figure is 7.3%. Several institutions have already expressed their willingness to renegotiate, such as Intesa Sanpaolo and Banco Bpm; Unicredit, for its part, has for about a month allowed the suspension of the capital share or the extension of the maturity for a period of up to four years. Federcasse President Augusto Dell’Erba announced that the BCCs “will find tailor-made solutions” for customers.

The advisability of a possible extension of the repayment plan, however, depends on many factors, starting with the number of years remaining until the end of the loan. The extension of the duration is not a zero-cost operation: if, on the one hand, the impact on the disposable income of a household is mitigated, on the other hand, the share of interest to be paid to the banks overall increases. In addition, there is the risk of not taking full advantage of a likely drop in medium-term rates. If a mortgage of 120,000 euros (Taeg of 4.38%) is extended from 25 to 30 years, the interest to be paid to the bank increases to a total of 91,566.67 euros, an increase of no less than 17,390 euros in just five years, or 3,478 euros per year, to obtain a reduction in the monthly payment of around 60 euros per month. Is this the right solution? We need guarantees in favor of the citizens”, emphasizes Codacons for his part. In short, everyone is called upon to calculate well. Knowing that banks are generally wrong in their calculations.