Euribor's new historic low sees Spanish mortgages plummeting

Although the official month-end figure will not be announced by the Bank of Spain until after the weekend, the plunge in the interest rate for the countries using the common currency is significant, having ended July on -0.283%.

The lowest Euribor rate in 20 years was recorded just over a week ago on August 21, at -0.399%, although rose by half a percentage point since then – but the final full month of summer 2019 will almost certainly see it break the -0.3% barrier for the first time in history.

For most of the last three-and-a-half years, after the Euribor fell into negative figures for the first time in February 2016, homeowners and homebuyers were consistently warned by economists not to rely too much on their 'mortgage honeymoon' continuing, with forecasts of an interest rate rise always just around the corner.

But it has never gone back up to 0% in all this time and plans by the European Central Bank (BCE) to increase it have constantly been shelved.

The Euribor has been in freefall for many years in an attempt to stimulate growth in the Eurozone by reducing prices, making credit cheaper, and homebuying more affordable, and to help households recover financially and enable them to spend more.

Latest forecasts once again show that the BCE does not intend to increase rates until at least 2020 and, if it does so, this will be the first rise since 2011.

Even this, though, appears less probable, with the Eurozone's economy having contracted in the past few months – including in its most financially-buoyant nation, Germany, whose GDP shrunk by 0.1% in the second quarter of 2019 – due to trade wars fuelled by Donald Trump's USA and by the continuing threat of an imminent no-deal Brexit.

Spanish mortgages use the Euribor to set their interest rates, which are typically between 1% and 3% above the Eurozone figure.

Unlike in other EU member States, such as the UK, where interest increases or falls are reflected immediately in variable-rate mortgages, home loans in Spain are updated annually.

This means payments remain the same for a full 12 months even on a variable rate, so if forecasts predict an increase, homeowners have plenty of time to plan and to consider swapping to a fixed rate to prevent uncertainty.

With the Euribor being so low and continuing to drop, fixed-rate mortgages in Spain are in a minority.

In light of the latest Euribor fall, a typical mortgage in Spain – of €100,000 over a 25-year term – would, if due for review at the end of August, become €98 a year cheaper, or €8.21 a month.

The lowest interest rate at present seen on a Spanish mortgage is 0.17% above the Euribor and many of those signed up in the pre-recession years – between 2005 and 2007 – have rates below 0.4%, meaning the Eurozone rate would have to plummet even further before homeowners would, in theory, actually be paid by the bank for having a mortgage.

But this scenario is unlikely, as it is probable that the banks would simply stop charging interest in these cases instead.

For those contracted during or after the recession, the 'Euribor + X%' figure has generally been higher to prevent this from occurring.

Even if the Eurozone interest rate does rise, increases have always been very gradual, and the late 2007 historic high of 5.6% was an exception that does not look likely to be seen again.