Mortgage Rates Drop: What it Means for Homebuyers and Borrowers

Mortgages, 8 cents drop on the average rate in December

Eight cents of average reduction certainly does not constitute a turning point. But they are a sign that the winds in the mortgage market may be changing. The eight cents are those that divide the 4.5% recorded in November 2023 by the Abi as the average of the cost of new loans granted to families and aimed at purchasing a home with the 4.42% recorded in December. The data is all due to the sudden drop in the Eurirs, the parameter linked to long-term cost of money forecasts and which serves as the basis for fixed rate mortgages. Between October and November the parameter dropped by almost one point and consequently mortgages also benefited. Variable mortgages, however, remained almost unchanged.

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Who benefits from falling rates

The drop in rates is favoring young people and low-income households who can more easily request subsidized mortgages guaranteed by the Consap fund. The fund, refinanced by the latest Budget Law, offers a guarantee equal to 80% of the residual debt on loans with a high coverage rate (mortgage equal to or greater than 80% of the value of the mortgaged house). The conditions offered by banks are improving and are well below the threshold established by the regulations.

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What changes for those who take out a mortgage?

What does all this mean for those who need to get a mortgage today? Let’s start from the observation that the vast majority of requests and disbursements now take place at a fixed rate, on the other hand in this phase not only does the fixed rate have on its side not only the certainty of the installment but also a cost that is around 150 cents lower, a situation which has never occurred and which defies common sense.

Mortgages, fixed rate examples

Translating into installment terms, a 140 thousand euro loan aimed at purchasing a house worth 200 thousand over twenty years has a fixed installment of 812 euros, the variable installment of 924 euros. At thirty years the fixed loan costs on average 629 euros, the indexed one requires 752. However, the fixed mortgage hides a pitfall when you choose it: the rate is defined at a pre-established moment in the approval process and could be higher than what was expected, especially if the rate is not “finished” but calculated on the basis of the Eurirs plus spread parameter. The problem is that the Eurirs is quite volatile and can go up or down by one point within a short time. Once the rate has been defined, it is kept for the entire duration of the mortgage, unless subrogation is resorted to.

variable rate mortgages and the trend of the Euribor

The forecasts on the trend of Euribor, the variable parameter, are instead of a rather sharp decline already in the second part of the year. If we go back to the mortgages in our example, the 20-year loan that pays 924 euros today would see the installment drop in a year, if rates were one point lower, to 811 euros; with a reduction of one and a half points it would drop to 754 euros, effectively equalizing the cost of the fixed mortgage and if the decrease was by two points (perhaps an unlikely scenario for the end of 2024 but not unrealistic) the installment would be reduced to 698 euros. In the thirty-year term, the starting variable installment of 752 euros would drop in January 2025 to 637 euros with a drop of one point in the Euribor, to 579 with a drop of one and a half points and to 522 if the reduction was two points.

2024-01-19 06:49:09
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