The European Central Bank has decided not to increase the reference interest rate in the Euro zone and to keep it at current levels for the time being, but it has wanted, yes, to warn of the risk that this increase could occur at any time, so warns of the difficulty in which families who are getting into debt when buying a home through a mortgage loan can find themselves.
This notice from the ECB confirms the tendency of the financial market to maintain the ascending process of interest rates started from the beginning of this year. Confirming this tenure, statements and studies appear in various media that the 12-month Euribor interest rate (the reference rate for mortgage loans) will be around 4% at the end of this year. Reaching this digit would imply An important quantitative leap since it would mean that in just twelve months, the interest rate most used for the formalization of mortgage loans would have increased by 43.88%.
This scenario, which seems to be outlined with increasing clarity by the end of this exercise, would represent, from the point of view of costs, for families with a 26-year mortgage (average term of formalization of mortgages according to the National Institute of Statistics) an increase of € 22.40 in the monthly installment for every six thousand euros of pending loan, but if this calculation is carried out adjusting to the average amount of the mortgages signed in the last period, which is € 140,179, (with an increase in the amount of the 13.5% in the last twelve months), the resulting fee would be increased by a total of € 623.24 more each month.
In the face of such a changing scenario and with such a marked trend of rising interest rates, we could say that there are two alternatives to combat such a situation. The first, the easiest to expose, although the most difficult to fulfill since it depends on the needs of families, would be not to buy flats and wait for interest rates to drop again, a situation that will not occur again in the next times, at least to the levels to which in recent years we have become accustomed.
All the studies and comparative analyzes with the rest of the EU countries have been indicating to us that the interest rate in Spain was very low in relation to the country's own economic situation. But the option of waiting to buy, based on the rate of home sales and the increase in new family units that the INE continues to count and the consequent demand for new homes, makes it totally unviable. The need exists and must be met.
The second alternative, from a cost analysis point of view is the most reasonable, to avoid the risk to which mortgages are now exposed that interest rates maintain the bullish line as not only the EU economy fluctuates even (due to the repercussions of globalization) the world economy. In this line, the proposal could include securing the interest rate by formalizing new mortgage loans at a fixed interest rate, an option that can also be applied to loans currently in force since (according to current legal regulations) it allows a minimum cost, modify the indexing conditions of current mortgages.
However, and despite the fact that it seems to be a clear and low risk alternative, we find that our country together with Portugal and Great Britain are the three in the European Union that continue to use the variable interest rate in the references of the costs to be applied in mortgages. Obviously this situation is given, in addition to the conjuncture of interest rates due to a certain historical process, a consequence of the evolution that in recent years in which mortgages that were not indexed and were formalized at a fixed rate, when produced such an accelerated fall in interest rates, the owners of these mortgages were found with costs well above the market. This situation led to a change in the trend of mortgages,going from being most of them at a fixed rate to practically all being at a variable rate.
Now with the increase in the price of money, it seems logical to think that what corresponds is to ensure an interest rate on the mortgage and thus avoid that the domestic economy is subject to the expected upward variations that the ECB may make and above all avoid the shocks that each year involves the revision of the mortgage. But once again there are certain inconsistencies and that is that in view of the recommendations of both the ECB, as previously indicated, also of the Spanish Mortgage Association and of the Ministry of Economy and Finance, the reality persists in conducting the new formalizations of mortgage loans a Once more to indexation, that is, to the variability of interest rates.
To reason this fact, it is only necessary to take a short walk through some of the most active credit institutions in the mortgage market (along the same lines, banks and savings banks) and we will observe that the offers for a variable rate mortgage are around 4 % (standard differential of 0.50% included) for the first six months and subsequently revisable (currently it would be 4.30%), without any difficulty so that the repayment period is up to 30 or 35 years. If we carry out this same exercise with the intention of having a fixed-rate mortgage, the situation changes significantly.
The following table is a reflection, which without pretending to be the compilation of all the options, gives an idea of the situation of the offers to formalize a fixed-rate mortgage.
| Mortgage term | Contracted interest rate. |
| 12 years | 5.10% |
| 15 years | 5.30% |
| 20 years | 5.70% |
| 25 years | 6.00% |
| 30 years | 6.20% |
(Table 1 own elaboration)
Given these proposals, we must ask ourselves whether it is not more risky to formalize fixed-rate mortgages, especially if we attend to the forecasts that are being considered at the moment about the evolution of interest rates. Currently, it is estimated that the evolution of the 12-month Euribor could come to stand in the next three years at levels of the order of 5.50 / 5.70%. With this we would estimate that our variable rate mortgage could have a maximum interest cost (including the differential) of around 6.390% at the end of 2009 (according to estimates by the AHE), while the current proposal for mortgage loans at a fixed rate, if we are in the average term of the 26-year mortgages, it is already at this level.
Graph 1 - own elaboration
Graph 1 places us in a scenario in which the buyer of a home, given the current difficulty in being able to meet quotas due to both the increase in the price of the home (basic element) and the interest rate, now in the interest of A greater future guarantee in terms of your ability to pay, it is recommended that you attend to the formalization of this purchase through a fixed-rate mortgage, but what is not taken into account in these recommendations or suggestions (according to the interlocutor) is that the current acquirer is being required to increase the amount of his mortgage for two years in order to provide (not guarantee) a better installment in the future.
Graph 2 - own elaboration
This exhibition is not intended to decide on behalf of future home buyers or even current mortgage loan holders who intend to maintain a fee more in line with their possibilities and avoid fluctuations or negative alterations in the future, if not just put I manifest that once again the market goes one way and the desires on the other. Of course, it is desirable that the purchaser of a home may have certain guarantees that will not be found in a situation in which he cannot pay the monthly mortgage payment, but it cannot be at the expense, as could happen if we We propose, at the current fixed interest rates that they offer us, not to buy the house now because they cannot go to the installment.
Obviously, the risk is high when formalizing at a variable rate with this forecast of increased interest rates, which should at least make you think before making a purchase decision, first of all to new (or current mortgaged) if on stage proposed, that is to say with an interest somewhat higher than 6% in three years, they will be able to continue paying the installment, but the economic authorities must also be called to attention, since if measures are not taken, there will not only be late payment problems in financial institutions due to the difficulties that mortgage holders will have to pay the installments, which means that the financial system will be unstable, if not the most important sector (economically), such as construction, may suffer significantly and consequently all the national praise.
