In the last decade, the ECB has carried out a very expansive and provided more liquidity than ever to financial institutions. Its objectives have been GDP growth of the euro zone, the reduction of interest paid by the national treasuries, avoid deflation and reach a CPI close to 2%, the last level being considered optimal by the central bank.
His most outstanding performances have been the debt acquisition in the secondary market and the establishment of the lowest interest rates since the birth of the eurozone. On March 9, 2015, the ECB began the purchase of public bonds and on March 16, 2016 it raised its main rate al 0%. However, this was already very low since July 11, 2012, since on that date it fell below 1% for the first time.
To encourage the granting of loans, on September 12, 2019, the ECB set the interest rate of the marginal deposit facility at -0.5%, this being the remuneration that banks receive to date for most of the capital accumulated in the monetary institution European. In an unusual way, financial institutions do not charge for their deposits, but rather pagan for doing them.
The previous rate explains why in January 2021 the monthly average of the one-year Euribor reached its historical minimum and stood at -0.502%. Unlike individuals, banks they can’t put their money under the mattress. The main alternatives to which they allocate their liquidity are loans to families and companiesthe acquisition of debt, the granting of credit to other banks and its deposit with the ECB.
In the recent past, the low demand for credit from individuals and the low interest rates on debt generated a large imbalance in the interbank market. A large number of entities had excess liquidity and only a few needed to obtain it. A situation from which the latter took a good profit.
Borrowing banks did not offer lenders to pay them no interest, but simply charge them less than the ECB. Between September 2020 and January 22, the former settled for receiving more than 0.4% and less than 0.51% per year for each euro received, both being the values between which the one-year Euribor moved .
The previous financial situation notably favored families with a mortgage at an interest rate variable for many years, since a few paid zero and the vast majority paid less than 1%. For the first time, a competitive loan offer appeared fixed rate and the result was a high growth of its market share. Between 2015 and 2021, its percentage in new loans went from 8.6% to 60.3%.
In the past financial year, the dominance of the mortgage market by these loans was explained by the higher profit margin per euro lent provided to banks, the extension of its amortization period up to 30 years and the low cost of coverage of the risks involved in granting it. In other words, the rainbow appeared, since the most beneficial option for entities was also for families.
In a one-year period, the ECB’s concern about a low inflation has been transformed into another by an excessive rise in the prices of goods. A rapid economic recovery, a poor functioning of the global logistics chain and the high increase in the price of raw materials due to the war between Russia and Ukraine have taken inflation in the euro zone in April to 7.5%, this level being its all-time high.
In the second half, the previous CPI will presumably trigger the completion of debt purchases by the ECB and a rise in its interest rates. Actions already discounted by participants in the interbank market and whose result has been the return of the one-year Euribor to positive values for a few days in April.
In the new context, families with a mortgage to fixed interest rate is it so very calmsince the rise in the one-year Euribor will not have any repercussions on your finances.
On the other hand, those that are indebted at variablethey have a difficult dilemma to solve: do I continue with the current one or did I change to a fixed-rate mortgage?
Second homes must make a quick decision, as Time is against you. Expectations of interest rate hikes by the ECB are making constant installment mortgages more expensive by increasing the price of their coverage. Currently, a large number of families can still get a flat rate of 1.5%. However, if they wait until September to process the change, they will most likely have to settle for obtaining one for which they pay annually. a minimum of 2%.
Whatever they do, they will not be completely sure that they have made a good decision, since no one is capable of accurately estimating the evolution of the one-year Euribor in the next 20, 25 or 30 years. However, what happened in the past provides us with some important indications of what may happen in the future, although it is difficult in the second period to faithfully repeat what was observed in the first.
Between 1999 and 2021, the average of the previous index stood at 1.79%. However, this is data that is easily misinterpreted, since between January 2009 and last year the one-year Euribor reached exceptionally low values. The culprits were the subprime mortgage and Covid-19 crises, as well as the scant increase in GDP generated by the application of austerity policies. In a more stable period, such as the one between the birth of the euro and 2007, the average of this index rose to 3,38%.
In the first case, if the mortgage conditions were equal to one year Euribor +0.5%, the borrower would pay an average interest rate 2.29%. In the second, much more likely than the previous one, he would pay 3.88%. Both clearly higher than the fixed 1.5% that many families can still access today.
If the mortgage had 20 years left to live and the outstanding debt was 100,000 euros, the three alternatives presented would mean an interest payment of 24,735.69, 43,922.20 and 15,810 euros, respectively. Therefore, the third would generate savings equivalent to 8,925.69 and 28,112.2 euros compared to the first and second. Amounts that would scarcely decrease if the borrower, in order to achieve the desired interest rate, needed to transfer his loan to another entity, since the cost of the subrogation is that of the appraisal of the home.
Undoubtedly, the savings obtained are lower if the mortgage has only a few years left to live and the debt pending repayment is small. Thus, for example, if the first variable is five annuities, the second reaches 30,000 euros and the borrower changes financial institution (the appraisal costs 400 euros), the discount on the interest paid is for an amount equivalent to 221.05 and 1,494.55 eurosrespectively.
Ultimately, in the near future the one-year Euribor can only rise, since a negative value of the index continuously between February 9, 2016 and April 11, 2022 constitutes a great exception to the rule. For this reason, my recommendation to almost everyone with a variable rate mortgage is to replace it with a fixed one.
Since most banks offer better terms to new customers than to old ones, as they are more interested in your catchment that in your loyalty, I advise you to use the digital mortgage platforms to find out about the most interesting offers on the market for free. In a few days, they will have them without being forced to make any displacement.
Finally, I advise you make the decision quickly, since the interest rates on fixed mortgages have increased since the start of the war in Ukraine and it is very likely that their rate of increase will accelerate in the coming months. If so, a type 1.5%, still feasible today, will be impossible for most to obtain in September. On that date, I would not be surprised if almost no bank offered less than 2%.
–
