Rocketing Euribor rates – and how to get help - explained

AFTER more than six years with the Eurozone interest rate, or Euribor, in negative figures, mortgage repayments have now risen at unprecedented speed and within one calendar year, leading to first-time buyers or those originally seeking to upgrade their homes having a major rethink.

Given that rates have remained stable – and very low – for so long, a variable-rate mortgage has long been the most financially-sound option for homeowners, since a fixed-rate loan tends to involve higher interest as well as an inception fee to freeze the rate for anything from two to five years or, in some cases, up to 10 years.

But then, the common currency interest rate upon which Spanish mortgages are based has never risen so quickly and dramatically, at any point in its 24-year history, as it has in the past six months.

Whilst it would not seem likely the Euribor will ever reach its record highs again, or that similarly exceptional hikes would be applied in the near future, the situation has generated widespread alarm nationally – enough that the Spanish government has swiftly introduced new legislation to soften the blow.

Firstly, what has happened to the Euribor, exactly?

Differences in repayments on the same loan amount and term are not uniform – more recent mortgage contracts, where the interest is higher than the capital, have reportedly increased by up to 11 times those of much older mortgages where the capital makes up the bulk of the monthly payments.

On average, mortgages tied to the Euribor have risen by between a quarter and a half after a dramatic hike in common currency zone rates applied by the European Central Bank (BCE).

The entity, presided by former International Monetary Fund (FMI) chair Christine Lagarde (pictured below), lifted the Euribor by 250 percentage points by the end of 2022 and a further 50 this month – February 2023 – in a bid to counter consumer price-led inflation sparked by the Russian conflict in Ukraine, transport crises and fuel shortages.

As at this weekend, the Euribor stands at a provisional figure of 3.475%, compared with -0.335% a year ago.

April 2022 saw the rate rise above zero for the first time since February 2016, hitting 0.013%, and above 1% by August.

The greatest hike was seen between August and September 2022, when the Euribor went up from 1.249% to 2.233%.

And by December 2022, it had broken the 3% barrier – reaching 3.018% - for the first time since December 2008.

The Eurozone interest rate is currently higher than it was then – that year closed at 3.452%.

Some analysts predict it could reach 4% before the end of 2023, but that it will drop to around 2.5% by 2024.

Is this normal?

Since it was created in January 1999, the Euribor tended to hover between 2% and 4% for the first decade and a half, experiencing peaks of above 5% in the Millennium year and between June and October 2008.

At its highest-ever figure, July 2008 saw Eurozone interest shoot up to 5.393%, before going into free-fall: Within just one year, it had dropped to 1.412%, causing mortgages to fall by around a half to two-thirds.

The lowest-ever rate seen so far was in January 2021, at -0.505%, although there had been little variation in the previous five years.

How will it impact the property market and savings?

Economists have predicted that those with savings will not benefit from the rocketing interest rates until next year due to a 'catch-up effect'.

They also suspect that more expensive mortgages will force home prices down, to make them more affordable, until Europe-wide inflation begins to calm and the BCE lowers interest again.

Very low, and continually falling, interest rates allow home prices to rise – although the actual figure paid might be higher, the actual monthly cost to the new owner does not increase.

Instead, sharply-increasing interest rates could lead to home values dropping due to a fall in demand and potential buyers' budgets reduced.

Is Spain – and its banks – doing anything about it?

Fortunately for anyone who already has a mortgage in Spain and is now worrying about soaring expenses, the national government has sought to limit the damage to homeowners' pockets in the form of a Royal Decree, or Bill of Law, establishing a Banking Good Practice Code.

Whilst voluntary, adhering to the Code makes commercial sense, and has been adopted by 50 banks and building societies nationwide.

Royal Decree 19/2022 of November 22 supersedes that numbered 6/2012, which sought to improve protection for mortgage-payers deemed 'vulnerable' at a time when unemployment was high and redundancies frequent.

Since Royal Decree 6/2012, an EU directive was released preventing lenders from repossessing main residences until the owner had defaulted on more than 12 monthly payments, or 20% of the outstanding debt, whichever was the higher.

A decade on, banks adhering to the Code are expected to take steps such as allowing 'payment holidays', agreeing to increasing loan terms to reduce monthly repayments, or take steps to contain rising interest rates.

The Code will only apply to mortgages signed for up to and including New Year's Eve 2022.

Spanish variable-rate mortgages are normally reviewed annually, meaning they do not fluctuate from month to month in line with the Euribor on the date of payment, and effectively place a one-year fixed rate on them by default.

A standard loan would be set at 'Euribor + X%', meaning the banks are able to reduce interest if they wish by manipulating the 'X'.

Alternatively, they may decide to cap interest at a certain figure, irrespective of the Eurozone rate.

Banks which have signed up to the Code of Good Practice

So far, these include major nationwide high-street entities – Kutxabank, BBVA, Banco Sabadell, Banco Santander, CaixaBank, Bankinter, Deutsche Bank, Ibercaja, ING, Unicaja, Cajamar, Cajasur, Abanca, and OpenBank.

Others which have joined the scheme are known as cajas rurales, or rural building societies, which are smaller, local entities that tend to operate only in a specific town or part of its wider province.

They include Caixa Popular-Caixa Rural, Caixa Rural de Callosa d'En Sarrià, Caixa Rural de l'Alcúdia, Caixa Rural de Turís, Caixa Rural Galega, Caixa Rural San Vicente Ferrer de la Vall d'Uixó, Caixa Rural Torrent, Caja de Ahorros Monte Piedad de Ontinyent, Caja de Crédito de Petrel, Caja Laboral Popular, Caja Rural Católico-Agraria, Caja Rural Central, Globalcaja, Caja Rural Albal, Caja Rural Alginet, Caja Rural Altea, Caja Rural Asturias, Caja Rural Cheste, Caja Rural Granada, Caja Rural Guissona, Caja Rural Navarra, Caja Rural Villar, Caja Rural del Sur, Caja Rural La Junquera de Chilches, Caja Rural San Isidro de Vilafamés, Caja Rural San Jaime de Alquerías del Niño Perdido, Caja Rural San José de Burriana, Caja Rural San José de Nules, Caja Rural San Roque de Almenara, Caja Rural Sant Josep de Vilavell, Banco de Crédito Social Cooperativo, Banco Caminos, Arquia Bank, Caja de Crédito de los Ingenieros, Bancofar, Colonya-Caixa d'Estalvis de Pollença, Eurocaja Rural, Evo Banco, Targobank, and Unión de Créditos Inmobiliarios (UCI).

What help is available, and for whom

Some assistance is offered for homeowners affected by the interest rate hike, as long as they meet certain criteria – repayments that cost at least 50% of their monthly income, an annual gross income per household of less than €25,500, a loan payable for a main residence with a property value of not more than €300,000 at the time of purchase, and monthly repayments that have risen by at least 50% at any point in the past four years.

They are entitled to apply for a 'payment holiday' of up to five years, during which they only pay the interest, not the capital; mortgage interest reduced to the Euribor minus 0.1% for this five-year period; and an increase in the loan term of up to 40 years in total.

For homeowners who meet three of the four criteria – gross annual income, property value, and mortgage repayment increase – but whose monthly payments do not reach 50% of their earnings, options include a 'payment holiday' for the capital part only for up to two years, a reduction in interest to 'Euribor less 0.1%' for that period, and an increase in loan term of up to seven years, provided the total term does not exceed 40 years.

Help is, additionally, available for 'middle-income' homeowners – those with gross annual household earnings of no more than €29,400, whose monthly repayments are at least 30% of this, and who have seen an increase in these of a minimum of 20%.

For these people, the extended term – up to seven additional years to a maximum overall of 40 years – also applies, and they have the option to reduce interest rates for up to 12 months, with their repayments frozen for one year at the sum they were paying in June 2022.