“European Central Bank Continues to Raise Rates, Interest on Mortgages Expected to Rise Above 5% in Spain”

The European Central Bank has made it clear that it will continue to raise rates. At the last meeting, the agency moderated the rise in the price of money, but President Christine Lagarde stressed that the cycle of increases was not going to stop. The goal is for inflation to return to 2% and to do so they raise rates. One of the main consequences is that credit becomes more expensive. This is already being noticed and the Spanish are already placing interest on mortgages above 5% in the next 12 months.

According to the March consumer expectations survey (published in May) of the European Central Bank (ECB), interest in Spain would be situated in the next year at 5.25%, above the 5% expected in the February survey. In addition, it should be noted that it would be the first time that this interest rate has risen since the beginning of the year, since in the first two surveys, the perspective remained stable at 5%.

Since the restrictive monetary policy cycle began, the expected interest rate or the rate that is expected to be reached has been rising progressively. In June 2022, the month before the first rate hike, the expectations of the Spaniards marked the average interest on mortgages at 4% and it was in the following survey in July when it rose strongly to 4.5%.

The 5.25% expected by Spaniards is the second highest percentage of the European Union countries surveyed. So, the Italians are more pessimistic, since they place the average interest rate at 5.6%. In the previous survey, the percentage stood at 5.5%. All six countries surveyed have recorded significant increases in the past year. Germany is the country that has increased the average interest rate the most. According to the latest survey data, German citizens expect interest to be slightly above 5% (a bit below the Spanish outlook). In February 2022, the outlook was that the average interest rate would be slightly above 3%.

On the other hand, the citizens of the Netherlands have lowered their expectations. In November 2022, they expected the average interest on mortgages in their country to be 5% in the next twelve months, but in the latest survey, the outlook is for them to be 4.6%. It is the same percentage that the French and Belgians expect for the average interest on mortgages in their countries.

In general terms, according to ECB data, the citizens of the European Union expected in March that the average interest rate would be at 4.5% in the next 12 months, compared to 4% that they expected at the end of 2022.

Back in Spain, the latest data from the National Statistics Institute (INE) show that the average interest on new mortgages registered in February was 2.86%. In the case of the data from the Bank of Spain, which are from March, they reveal that the weighted average interest rate was 3.54% and 3.50% in negotiations. However, it should be noted that there are already financial institutions that offer mortgages with an interest rate of 5%.

Fall in demand for credit

The Bank of Spain has already verified that in recent months the demand for loans fell, both from companies and from households for home purchase and for consumption and other purposes. This drop in demand would have been particularly pronounced in the case of loans to families for house purchase.

The decrease in requests for funds by companies is mainly explained by the increase in financing costs and by lower investments. In the case of households, lower consumer confidence would also play a role.