The increase in the cost of money: rising rates
The increase in the cost of money by another 50 cents by the ECB certainly complicates life a lot for those with a variable rate mortgage, but it also risks having significant repercussions on the real estate market. The Euribor, the parameter used to index the cost of variable mortgages, reached 2.92% on Monday 6 March (quarterly rate calculated over 365 days) thus aligning itself with the current value of the ECB rate, now at 3%. Everything suggests that between the end of March, the day after the increase that will be formalized in Frankfurt, in mid-April it will in turn increase by 50 cents, because since July 2022, i.e. since the ECB rate dropped from zero, the Euribor he replicated the trend. A 50 cent increase weighs roughly 40 euros per month for every 100,000 euros of borrowed capital. Meanwhile, the governor of Bank of Italy Ignazio Visco has once again called for prudence in the monetary policy choices adopted in Frankfurt.
Read also:
– ECB rates on the rise, as mortgage payments increase: 4 examples to understand the emergency
20-year Eurirs above 3%
Eurirs is 20 years oldthe parameter considered the benchmark for the calculation of fixed mortgages, on Monday 6 March it was positioned just above 3%, falling back by a few cents compared to last week, but the extreme volatility of this indicator does not allow for predictions. Remaining today, fixed-rate and variable-rate mortgages are offered, in theory, at similar conditions, but in all probability within a few weeks the variable-rate ones will increase again, without however stopping their run because Christine Lagarde has let it be understood that if core inflation does not cool down, the central bank’s policy will become even more restrictive.
The choice of the fixed rate and the restrictions of the banks
Of course, in a situation like this, the choice in favor of landline by those who want to buy a house and have to resort to financing presents no doubts, at least for those who have to get into debt at or near the limit of their income capacity. However, there is a significant problem, and for this reason we say that the fixed mortgage could be a theoretical choice.
Nobody knows today how long there will be inflation and high cost of moneybut it is practically certain that when inflation returns to the level judged physiological by the ECB, i.e. 2%, rates will drop and then the subrogations of fixed mortgages will inevitably restart.
However, the banks have no interest in granting loans that will clearly be substitutes, so a tightening on concessions appears inevitable, especially for mortgages over 20 years. According to the real estate agencies, the previous increases have already led to a slowdown in transactions in the last part of 2022 and to measure the extent of the slowdown it will be enough to wait for Thursday 9 March with the official data from the Revenue Agency, but the situation is probably further worsened in this first glimpse of 2023.
Read also:
– ECB rates on the rise, as mortgage payments increase: 4 examples to understand the emergency
Fixed rate mortgages, what happens with the rate hike?
And we come to those who have a variable rate mortgage in progress and have not been able to replace it in time. Let’s see what happened to four pairs of 20- and 30-year indexed loans of 200,000 euros, all taken out at a rate calculated on the monthly average of the 3-month Euribor with a spread of 1.30% (at 20 years) and 1.50% (at 30) (here the tables). The extent of the increases depends on the residual duration of the loan and the initial rate: the greater the number of installments to be paid and the lower the starting rate, the higher the increase in the installment. Assuming that in May the Euribor will be positioned at 3.5%, those who took out a 30-year mortgage in 2018 will see the installment double compared to the initial one, in fact it will go from 641 to 1273 euros (632 euros more). It greatly limits the damage to those who have a 20-year mortgage taken out 10 years ago, given that the increase compared to the initial installment is 295 euros.
Read also:
– ECB rates on the rise, as mortgage payments increase: 4 examples to understand the emergency
The options: renegotiate with the bank or switch to landline
There are ways out of this situation but they are not easily feasible. The first is renegotiate with the bank, a solution also advocated by Christine Lagarde, who argues, hard to blame her, that institutions have no interest in increasing the mass of non-performing loans. With your institution you can change the type of rate, the residual duration of the loan, the methods of amortization of the capital. It is said that Lagarde’s invitation will not be listened to. The bank can also be forced to switch from variable to fixed, if it is a first home, if the payment of an installment has never been delayed and if you have an ISEE of less than 35 thousand euros. Assuming you are entitled to it, under current conditions, however, the fixed rate would be above 4%. Finally, it can be subrogated at a fixed rate (always around 4%) but since there is no limit to the number of subrogations that can be made, the banks, for the reasons set out above, are unwilling to welcome new potential fraudsters.
