Spanish mortgages get cheaper as Eurozone interest rates reach new lows

EUROZONE interest rates are close to historic lows and expected to end July on -0.49% - and, as Spanish mortgages are linked to these rates, buying a property is likely to be cheaper in the next month without home prices having to come down.

The Euribor, or the interest rate that applies in member States using the common currency, has been in negative figures now for five-and-a-half years, since February 2016, having been dropping drastically since the global recession took hold.

From highs of well over 5% at the beginning of 2008, forcing mortgage repayments up, the Central European Bank (BCE) has been dropping rates constantly since, in a bid to make finance more affordable for households and businesses and increase liquidity in the Eurozone.

Although every year brings warnings that the 'honeymoon' is likely to end imminently, they have so far proven unfounded – the BCE does not intend to consider a rate rise unless and until the common currency area inflation levels exceed the long-term target of 2%.

For as long as inflation stays below 2%, the Euribor is expected to stay at less than 0%, although some variation in either direction may be seen in the next couple of years, analysts believe.

Meanwhile, if the Euribor sits at the forecast -0.49% as at midnight on Saturday, monthly home loan savings could be significant.

Based upon the average mortgage in Spain – a loan of €150,000 over a 25-year term at a rate of Euribor plus 1% - would, if they were due for review at the end of July, drop by around €14 a month, or €170 a year.

Spanish variable-rate mortgages are reviewed annually, or in some cases, every six months, meaning a sudden interest rate rise will not mean the very next payment goes up – homeowners have a full 12 months to plan if they see that the Euribor is rising, and time to make a decision about applying a fixed rate if it looks as though their payments will be going up next year.

In other countries, variable-rate mortgages fluctuate constantly month by month according to interest at the time, which can suddenly leave homeowners with an unexpected big bill if a rate rise occurs, but this is not the case in Spain; to this end, the vast majority of Spanish mortgages are variable rather than fixed.

That said, anyone whose mortgage is reviewed twice-yearly rather than annually and whose loan is due for review at the end of July will see a slight rise in payments, since the Euribor is marginally higher than it was at the end of January – in the same example of an average €150,000 loan over 25 years with a 'Euribor-plus-one' rate, monthly repayments will go up by about €1.

Fortunately, Euribor increases have typically been very gradual, a fraction of a percentage point per year since the common currency was introduced, meaning homeowners are able to plan long-term by watching trends over months or even years before making a decision to fix their rate.

Analysts generally concur at present that the Eurozone interest rate is likely to end this year at an average of -0.5%, even lower than July's closing figure, but that the mean figure for 2022 will be around -0.41% and could rise to -0.26% by 2023.

But this is still largely lower than the rates seen at the end of the 2010s, so anyone who already had a variable-rate mortgage towards the close of the last decade will know what type of figures to expect.

The pandemic has caused some shrinkage in the economy across the Eurozone, so it is likely interest rates will be kept down to help stimulate cashflow and aid recovery – a situation that may continue for at least a couple of years.

Conversely, Spain's housing market has become more buoyant and home values risen during the Covid crisis, largely triggered by the spring 2020 lockdown which led householders to rethink where they wanted to live if they were going to be stuck indoors again, and a rise in working from home meaning more choice of location, fuelling an increase in house prices in coastal and country areas to the detriment of large, inland cities, and soaring demand for villas with pools and gardens or apartments with spacious terraces.

Ever-decreasing mortgage interest rates mean the rising home prices are not necessarily any more expensive for buyers, except those purchasing in cash – borrowing capacity increases, but not outlay, allowing sellers to add on a few digits to their price tags without putting potential new owners off.