Title: Mortgage Business Takes a Hit as Interest Rates Soar
Subtitle: Mortgage cancellations surge while new home loan signings plummet
Date: [Current Date]
The sudden surge in interest rates has had a significant impact on the mortgage business, with new home loan signings experiencing a sharp decline and mortgage registration cancellations skyrocketing. According to data from the National Institute of Statistics (INE), loans for purchasing houses fell by 18.3% in April compared to the same month last year, reaching a total of 27,053, the lowest figure since December 2020. This decline marks three consecutive months of negative growth, following a 15.7% drop in March and a 2% decrease in February. The main cause of this downturn is the increased cost of financing due to monetary tightening, which has led to a surge in mortgage cancellations as individuals seek to save on financial costs.
In March, mortgage cancellations in the Property Registry reached a total of 44,171, the highest number since the burst of the housing bubble in May 2008. Although the figure moderated in April, with 32,737 cancellations, the first four months of 2023 saw a total of 147,465 cancellations, representing a 7.9% increase compared to the previous year. This trend indicates that amortizations are surpassing new mortgage production for three consecutive months.
The rise in amortizations can be attributed to the current market situation. For individuals with savings, it is more financially advantageous to repay a loan with an interest rate that already reflects the European Central Bank’s rate hike, rather than maintaining a deposit with low remuneration. “If you have savings, it is more efficient to pay off your mortgage, unless you get more yield from your savings than what you pay in interest,” summarize banking sources. Antonio Pedraza, president of the Financial Commission of the General Council of Economists, highlights that there is still a certain level of stored savings, approximately 6.5% of disposable income from the pandemic, and the best way to utilize these savings is by paying off the mortgage early.
In April, the average interest rate on term deposits was 1.41%, while housing credit had an average interest rate of 3.61%, according to data from the Bank of Spain. Additionally, banks are currently prohibited from charging commissions for early repayment of adjustable mortgages until December 31, 2023, providing further incentive for individuals to reduce their debt.
The European Central Bank has raised the price of money by 400 basis points in less than a year, from 0% to 4%. The Euribor, the index to which most variable-interest mortgages are referenced, has steadily climbed and now exceeds 4.1% in the daily rate, resulting in an average increase of 300 euros per month in mortgage fees. This indicator reflects expectations of further rate hikes, prompting consumers to seek solutions to mitigate their mortgage bills.
Individuals who lack the liquidity to repay their mortgages can choose to renegotiate or request new mortgages with more favorable conditions, fearing further increases. “Consumers look for formulas that involve putting the mortgage at a fixed or mixed rate, which is perhaps the most popular option today. It allows them to temporarily have a fixed interest rate below 3% for 3, 5, or 10 years, with the hope that once that period is over, the Euribor will have stabilized,” explains Ricardo Gulias from RN Tu Solución Hipotecaria. The current surge in cancellations, followed by the establishment of new mortgages, is a result of the greater dynamism of this option compared to mortgage subrogation.
Laura Martínez from iAhorro points out that many banks only offer the possibility of canceling and opening a new loan because the French amortization system starts from scratch. This means that in the first years, more interest is paid than principal, and when applying for a new mortgage, an origination fee may be charged. However, whether the entity offers cancellation or subrogation depends on factors such as the user’s profile, the requested modifications, and the bank’s objectives.
The banking sector acknowledges that subrogating mortgages is now more challenging than in the post-pandemic period when the sector fought to gain market share from other entities. It is also worth noting that the cost of mortgage cancellations has decreased in recent years due to the Mortgage Law, with the average cost of notary, agency, and registration fees now around 1,000 euros.
Experts predict that the downward trend in mortgages and the increased cancellation activity will continue due to the prospect of further rate hikes. Joaquín Maudos, a professor at the University of Valencia, emphasizes that this pressure is particularly challenging for vulnerable families who allocate a significant portion of their income to mortgage payments. Ferran Font from pisos.com anticipates one or two more increases by the European Central Bank between now and the end of the year, suggesting that cancellations will persist. Nomura analysts do not expect any rate cuts until just over a year after the last rise.
According to the latest statistics, the average interest rate for mortgages used to buy homes has risen by 1.32 points in one year, currently standing above 3% at 3.09%. This is the highest value since April 2017, marking a significant increase from the 2.65% recorded just three months ago. The average term for mortgages is 24 years. Variable rate loans continue to gain ground, accounting for 38.7% of the total in April 2021, the highest percentage to date. Meanwhile, 61.3% of housing loans were established at a fixed rate, a decrease of 14.1 points compared to July 2022 when it reached a peak of 75.4%.
As interest rates continue to rise, the mortgage market faces ongoing challenges. It remains to be seen how individuals and financial institutions will adapt to these changing conditions and seek the most favorable solutions for their mortgage needs.
Follow all the information of Five days on Facebook, Twitter, and Linkedin, and subscribe to our newsletter, Five Day Agenda.The sudden rise in interest rates has had a significant impact on the mortgage business, with a decrease in new home loans and a surge in mortgage registration cancellations. According to data from the National Institute of Statistics (INE), loans for purchasing houses fell by 18.3% in April compared to the same month last year, reaching a total of 27,053, the lowest figure since December 2020. This decline marks three consecutive months of negative rates, following a 15.7% decrease in March and a 2% decrease in February. The increase in interest rates has made financing more expensive, leading to a boom in mortgage cancellations as individuals seek to save on financial costs.
In March, mortgage cancellations in the Property Registry reached a total of 44,171, the highest number since May 2008 when the housing bubble burst. Although the figure decreased to 32,737 in April, the first four months of 2023 saw a total of 147,465 cancellations, representing a 7.9% increase compared to the previous year. This trend indicates that amortizations are surpassing new mortgage production for three consecutive months.
The rise in amortizations can be attributed to the current market situation. Individuals with more savings find it more profitable to repay a loan with an interest rate that already reflects the European Central Bank’s rate hike, rather than maintaining a deposit with low remuneration. Additionally, banks are currently prohibited from charging commissions for early repayment of adjustable mortgages until December 31, 2023, further incentivizing individuals to reduce their debt.
The European Central Bank has increased the price of money by 400 basis points in less than a year, from 0% to 4%. The Euribor, the index to which most variable-interest mortgages are referenced, has also been steadily climbing and has already exceeded 4.1% in the daily rate. This increase in interest rates has raised mortgage fees by an average of 300 euros per month. As a result, consumers are actively seeking solutions to mitigate the impact of higher mortgage bills.
Individuals who do not have the liquidity to repay their mortgages can choose to renegotiate or request new mortgages with more favorable conditions. Many consumers are opting for fixed or mixed-rate mortgages, which allow them to temporarily have a fixed interest rate below 3% for a certain period. This option provides some stability and allows individuals to take advantage of lower interest rates before the Euribor stabilizes.
The banking sector acknowledges that it is currently more difficult to subrogate mortgages compared to the post-pandemic period when banks were actively competing for market share. However, the cost of mortgage cancellations has decreased in recent years due to the Mortgage Law, which has reduced the average cost of notary, agency, and registration fees to around 1,000 euros.
Experts predict that the downward trend in mortgages and the increase in cancellation activity will continue due to the expectation of further rate hikes. The Euribor is expected to continue its upward trend in the third quarter, stabilizing between 4.50% and 4.75% in the final months of 2023. According to recent statistics, the average interest rate for mortgages used to buy homes has risen by 1.32 points in one year, reaching 3.09%, the highest value since April 2017. Variable rate loans now account for 38.7% of the total, while fixed-rate loans account for 61.3%.
Overall, the rise in interest rates has significantly impacted the mortgage business, leading to a decrease in new loans and a surge in cancellations. Individuals are actively seeking ways to reduce their mortgage bills and take advantage of more favorable conditions. The future outlook suggests that this trend will continue as interest rates are expected to rise further.
How are consumers seeking to mitigate their mortgage bills in the face of rising interest rates?
Er month. This has prompted consumers to seek solutions to mitigate their mortgage bills.
One option for individuals who lack liquidity to repay their mortgages is to renegotiate or request new mortgages with more favorable conditions. Many consumers are opting for fixed or mixed-rate mortgages, which provide a temporarily fixed interest rate below 3% for a certain period. This allows them to take advantage of current lower rates, with the hope that the Euribor will stabilize once the fixed period is over.
The surge in mortgage cancellations, followed by the establishment of new mortgages, is a result of the greater popularity and flexibility of this option compared to mortgage subrogation. While some banks may charge an origination fee for opening a new loan, the cost of mortgage cancellations has decreased in recent years due to changes in mortgage laws.
Experts predict that the downward trend in mortgages and the increased cancellation activity will continue due to the prospect of further rate hikes. This puts pressure on vulnerable families who allocate a significant portion of their income to mortgage payments.
As interest rates continue to rise, the mortgage market faces ongoing challenges. It remains to be seen how individuals and financial institutions will adapt to these changing conditions and seek the most favorable solutions for their mortgage needs.
