The rate of rise in interest rates on mortgage loans has been dizzying, following in the wake of the increase in the price of money from the European Central Bank (ECB) which last week raised them by a quarter of a point to 4%. Consequently, the one-year Euribor, with which variable-rate mortgages are calculated, since last Friday it has moved above 4%.
This meteoric evolution is transferred to the monthly installment that mortgagees must pay who, in the last two years, has grown spectacularly, becoming a big problem for many families. In June 2021, the Euribor was at -0.484% and in the same month last year it rose to 0.852%. In this important leap, a mortgaged went from paying 691.11 euros per month to 784.04 euros for a variable average mortgage with a differential over Euribor of 1.5 points. It would be a standard loan for the amount of 150,000 euros and a repayment term of 20 years. The annual cost of the rise in the Euribor would reach 1.115 euros.
But things get complicated if in June this indicator finally ends up closing the month above 4%. In this second review, the mortgaged party would end up paying a monthly installment of 1,038.76 euros which represents an increase in payment of 50.13% compared to 2021 and an increase in the annual cost of 4,171 euros (347.65 euros per month). Undoubtedly, a very large amount that will put many families in difficulties to meet those payments. The Government approved last December support measures to soften this increase, although only families with incomes of less than 25,200 euros a year and who have suffered a 50% increase in the mortgage effort with homes of up to 300,000 euros will be able to benefit.
This shock in the movements of the rates seemed unexpected after the long period of time in which the Euribor was negative. Thus, although there were very attractive offers on fixed-rate mortgages (reaching levels of 1%), many preferred to remain with the risk of those linked to the Euribor. The negative rates of this reference index began in February 2016 (-0.008%) and lasted until March 2022 (-0.237%), according to data collected by the Spanish Mortgage Association (AHE). Thus, for 6 years and one month, variable mortgages were an excellent option for borrowing, but European monetary policy took a sharp turn due to the also galloping evolution of rising prices (inflation) that still continues as a justification for the tightening of the rates applied by the president of the ECB, Christine Lagarde. Last week she already announced that next July the price of money would rise again, surely to levels of 4.25%.
The Bank of Spain collects the average rates applied to all mortgages (fixed, variable and mixed) and here it can already be seen a more moderate evolution than that suffered by those mortgaged to variable indexed to the Euribor. Thus, according to data from the body governed by Pablo Hernández de Cos, the average mortgage rate stood at 1.507% in May 2021. With this rate for the standard mortgage that serves as an example, the mortgaged party paid a monthly installment of 724, 3 euro. In May of the following year, the average rates rose to 1.624%, which meant a share of 732.4, almost 8 euros more than in the previous year. However, The great leap occurred again in May of this 2023 with an average rate of 3.967% with a monthly payment of 906.36 euros Therefore, the annual payment increases by 2,087.52 euros with respect to the previous year.
If the jump of the two years is taken, the average increase in the cost of the installment for the group of mortgages in Spain has been 25%. The forecasts to return to lower rates that alleviate the financial burdens of families are not very rosy in the short term. In addition to the expected rate hike in July by the ECB, experts do not rule out at least another hike throughout the year. We are close to finishing raising rates, but there is still a modest way to go. Investment banks also point out that the ECB will maintain these levels at least throughout 2024 before considering lowering them. A drop in the price of money prior to these dates would only be explained by a strong economic recession and, for the moment, that hypothesis is losing strength.
What factors contributed to the recent rise in interest rates on mortgage loans?
Interest rates in the market.
In recent weeks, the rise in interest rates on mortgage loans has been astonishing. This surge follows the European Central Bank’s decision to increase the price of money by a quarter of a point to 4%. As a result, the one-year Euribor, which is used to calculate variable-rate mortgages, has now surpassed 4%.
This rapid increase in interest rates is directly impacting the monthly mortgage installments that borrowers must pay. Over the past two years, these installments have grown significantly, posing a major problem for many families. In June 2021, the Euribor stood at -0.484%, but by the same month in the following year, it had risen to 0.852%. This substantial jump led to an increase in monthly payments for an average variable-rate mortgage with a 1.5-point differential over Euribor. For a standard loan of 150,000 euros with a 20-year repayment term, borrowers saw their monthly payment rise from 691.11 euros to 784.04 euros. The annual cost of this rise in the Euribor amounted to 1,115 euros.
However, the situation becomes even more concerning if, by the end of June, this indicator closes the month above 4%. In such a scenario, borrowers would face a monthly payment of 1,038.76 euros, representing a 50.13% increase compared to 2021. The annual cost of this rise would amount to 4,171 euros or 347.65 euros per month. This significant amount will undoubtedly create difficulties for many families in meeting their mortgage payments. In December of last year, the government approved support measures to mitigate this increase, but only families with incomes below 25,200 euros per year and who have experienced a 50% increase in mortgage burden for homes worth up to 300,000 euros will be eligible for assistance.
The sudden movements in interest rates came as a surprise after an extended period during which the Euribor remained negative. Despite the attractive offers available for fixed-rate mortgages, with rates as low as 1%, many borrowers chose to take the risk associated with variable-rate mortgages tied to the Euribor. According to data from the Spanish Mortgage Association (AHE), the negative rates of this reference index began in February 2016 (-0.008%) and lasted until March 2022 (-0.237%). For six years and one month, variable-rate mortgages were an excellent borrowing option. However, European monetary policy took a sharp turn due to the rapid rise of interest rates in the market.
The soaring mortgage interest rates are undeniably putting additional strain on countless families, creating an unsettling burden in an already challenging time.
This article highlights the distressing consequences of surging mortgage interest rates, creating an overwhelming burden for numerous families. It’s disheartening to witness the toll this rapid rise is taking on homeowners, potentially jeopardizing financial stability and future aspirations. Urgent measures are required to alleviate this strain and provide relief to those affected.