There is bad news (again) for many people with mortgages: things are not going to get any better in the short term. The rise in the benchmark Euribor rate is far from reaching its ceiling and variable rate loans will continue to become more expensive, at least during the first months of this year.
As feared, this indicator for the mortgage market ended last year above the psychological threshold of three per cent: the average for the month of December was 3.018% compared with 2.828% in November. Over the last 12 months, the index has risen by 3.52 points.
This new increase will mean a sharp rise in monthly repayments of variable rate mortgages, which are reviewed this month taking the Euribor in December into account.
Borrowers with a 150,000-euro loan over 25 years and a differential of one point will have to pay 260 euros more each month, which amounts to an extra 3,150 euros a year. For a 200,000-euro mortgage with the same conditions, the monthly payments will go up by 350 euros a month, totalling nearly 4,200 euros a year.
"We believe it is highly probable that the Euribor will stay between 3.5% and 4% this year," said Miquel Riera, the head of mortgages at the Helpmycash financial portal. However, it is difficult to predict where the mortgage rate will end the year because its value will depend on what happens to inflation, European Central Bank (ECB) policy and also the war in Ukraine.
"If the conflict in Ukraine is prolonged and inflation remains high in the months to come, the European Central Bank will be obliged to keep raising its rates because the Euribor will keep going up. On the other hand if inflation drops, whether because the war ends soon or because recent interest rate rises have had an effect, the ECB could soften its policy and the Euribor could remain the same or lower," Riera said.
The rise in the Euribor is already causing a slowdown in the mortgage market. "In the final months of 2022 not as many mortgage contracts were signed as earlier in the year, and we believe that is something that will continue. If the Euribor goes up, mortgages will be more expensive and fewer people will be able to afford to buy a house so there will be fewer applications for mortgages," Riera explained.
"Banks will also be more cautious, partly due to the economic instability and partly because of the higher cost of mortgage loans. They won't want to take risks so they will be more selective and it is probable that fewer applications will be approved," he said.
As a result, 2023 is likely to see a stagnation or even reduction in the number of new mortgages compared with 2022. And if fewer loans are granted, in Riera's opinion it is logical that property sales will also fall, because practically half of all purchases are financed by a mortgage.
Another logical consequence of higher mortgage repayments is an increase in the number of people who default on their loans.
"It is possible that this will happen, because the Euribor will make repayments on variable rate mortgages much more expensive and there will be customers who cannot pay the increase," Miquel Riera said.
He does, however, believe that two factors could temper the possible defaults. The first is that practically 30% of mortgages are fixed-interest, so their holders will not be affected by the increase in the Euribor. The second is that many holders will be able to renegotiate the conditions of their mortgages to reduce their repayments, either through direct agreement with the banks or via measures approved by the government.