Fixed-rate mortgages gaining in popularity says 'El Economista'

With the housing market in Spain showing clear signs of recovery after seven years of recession, 'El Economista' has reported that a number of banks are trying to tempt buyers to change their habits and opt for American-style fixed-rate mortgages.

Banco Sabadell were first to promote the scheme, with mortgage rate fixed at 3.95% for 30 years. CaixaBank is now offering mortgages at 2.5% and 3% over a 10-year period. Both of these products break the mould in a country where 90% of mortgages have variable interest rates.

The one year Euribor, Spain's main reference index for variable-rate mortgages, has dropped dramatically from its 2008 rate of 5%, to just 0.3%, depriving the banks of one of its main sources of income from the 13.8 million mortgages drawn up during the housing boom decade.

"Banks have improved their balance sheets and in terms of capital are now in a better position than they were", said José Luis Martínez Campuzano, one of Citigroup's strategists, "but in a climate of low interest rates, they need to be more profitable".

The European Central Bank (ECB) lowered its interest rates from 0.15% to 0.05% in September, bringing the Euribor down, and the quantitative easing (QE) programme announced on January 22nd could keep base interest rates low for some time. Banco Sabadell is predicting that 20% of all its new mortgage business will be fixed-rate loans.

Although 30-year fixed-rate mortgages are fairly common in the USA, most Europeans opt for variable-rate loans or fixed-rate loans over a much shorter period. In Germany, the average mortgage repayment term is 12 years, whereas in the UK a fixed-rate mortgage tends to be for no more than five years.

When the real estate bubble burst at the beginning of the recession, interest rate hikes by the ECB brought many "unpleasant surprises" in their wake for those with mortgages, with the one-year Euribor rising from 2.64% (the average for the last 15 years) to a record 5.39% in July 2008. As Juan Villén, head of mortgage lending for Idealista.com pointed out: "Many people people say that low-rate mortgages are going to continue for a long time, yet history shows that the Euribor can rise very quickly at any time, and unfortunately, people's salaries don't rise at the same rate."

Some banks are lowering interest rates on their variable-rate mortgages in a bid to attract clients. BBVA is offering rates of Euribor +1.6%, Banco Popular Euribor +1.55%, etc. "The problem with lowering interest rates is that it could lead to short to medium-term reduction in margins", explained Nuria Álvarez, an analyst with Renta 4. "This has never been a major problem in terms of bank profit margins up until now, but the risk exists".

According to Bankinter's CEO, María Dolores Dancausa, the Spanish mortgage market is going to be "enormously" competitive this year. "Mortgages are hugely profitable in the right conditions", she said, emphasising that the Spanish banks "are not going to lose their heads" when it comes to lowering mortgage interest rates.