The situation of the Spanish real estate market is going through unique moments. With Euribor in negative for the first time in its history, the credit to buy protected housing more expensive than ever until a few weeks ago and the boom in fixed-rate mortgages, analysts are shocked to an unprecedented situation.
The negative Euribor
What a few years ago was pure fiction, today is a reality. For the first time in its history, the main University Town Islamabad mortgage index, is at negative levels. And what is more serious, it has already closed two months at these levels, judging by the data received from the month of February.
Although some media outlets have advanced hypothetical situations in which the banks had to pay the borrowers, the reality is only a minimum percentage of those mortgaged is in that situation.
Let’s not forget that mortgage payments are usually calculated with a differential applied by the bank and added to the Euribor. In this way, even if the European index is negative, the total interest will always be positive.
In this way, except for some privileged, such as bank employees, this week’s news is simply good news.
And why this situation?
Especially at the fall in interest rates, that is, banks lend money to each other at a very low cost. Although economics is never known, analysts predict that this situation will not last long, since countries like the United States have already announced rate hikes.
In addition, the European Central Bank is not making things easier. Its continued punishment for the excessive liquidity of banks has made it more beneficial for them to open their hands to mortgage loans, although mortgages are granted only in situations of extreme solvency.
Consequences of the fall of the Euribor in negative
The main consequence of this situation of evolution of the Euribor is already experienced by mortgaged people throughout Spain. To give you an idea, for a mortgage of 120,000 euros at 25 years with a differential rate of 1% on the Euribor, the monthly fee would fall by about 14 euros, or what is the same, 173 euros per year.
But the consequences do not end there. These days it is common to see comments on social networks and specialized media that predict that, if the negative Euribor continues to fall, banks should start paying users for lending money, as we have already mentioned at the beginning of this article.
Should banks pay mortgaged?
It is currently an unlikely perspective. In the words of the president of the Spanish Mortgage Association (AHE), Santos González, the Euribor should reach up to -0.5% so that the differential could be eaten. If this situation occurs (not very realistic), the mortgaged would stop paying interest on their loans.
That is why we add to the common sense of analysts who claim that this fall of the Euribor should be much deeper so that mathematically it could be considered that banks would pay to lend money.
Another of the direct consequences of Euribor in a negative situation for banks is that they are no longer making money. This undoubtedly adds more uncertainty to the profitability of the financial sector and more directly, to the exchange rate of banks, which in recent months is very unfavorable.
Mortgages and Euribor: Consequences
Given what has been seen, it is advisable to warn our readers of one thing: mortgages are already being signed that mark a minimum cap on their 0% differential. In this way, in the worst case, even if the Euribor continued to lower the banks they would continue to enter money for interest.
We do not know if in the future these contracts will be revoked as in the case of the ground clauses, at the moment there they are and they are already being signed for the houses for sale in Islamabad. In this sense, the OCU has warned that this situation necessarily implies that the banking entities must comply with the agreement. Otherwise, they will initiate the relevant actions.
Expensive loans for protected housing
While free housing enjoys a privileged situation, protected housing, regulated by the State suffers the opposite situation, or has suffered until recently.
To access the purchase of an officially protected home, consumers can apply for a loan, whose interests are marked by the State. These interests marked by the Administration and granted by the credit institutions are reviewed annually in the councils of ministers and have certain peculiarities:
- No commission can be applied.
- The installments will be constant in the different mortgage repaymenttranches .
- They will only be granted by those financial entities that have signed agreements with the Ministry of Housing.
Well, these credits were until last February more expensive than 15 years ago. Until a few weeks ago, the interest on a loan for this type of housing had only been regulated 3 times since 1998, so its reality was far from that of consumers of free housing.
To give you an idea, if you buy a free home and request a mortgage loan of € 100,000, today you would be paying approximately € 550. In the case of protected housing, until recently the same credit would be € 632.
What will happen? Click here
What we do not know is what will last this decline in the rates for housing VPO announced by the acting vice president in the Council of Ministers last February 26. The measure, which will affect more than 370,000 families throughout Spain, will mean an annual saving of € 200.
Everything suggests that the incoming Government will maintain this measure that many have applauded, but that it still does not satisfy everyone, since the approved reform is still far from the reference values used for free housing, that is, the Euribor.
From Inmogesco we are glad that many mortgaged VPOs have been able to see at least an improvement in the conditions of their contracts, since it was a flagrant situation that disadvantages many families using this type of housing, and in most of the cases of low income.
Fixed rate mortgages, more than ever
The last of the realities in which we look today and that evidences a situation of the real estate market the less “atypical” is fixed rate mortgages. If at the end of 2006 its presence with respect to those of variable type was anecdotal, today it is more than evident.
With data from November 2015, when the recovery of the real estate sector was already palpable, 90.3% of the signed mortgages did so under variable rate conditions. It does not mean that the rest were at a fixed rate, since in our country there is also a third formula, that of the mixed type, although its presence among individuals is very low.
Why are there more fixed rate mortgages?
As we have commented on other occasions, the fixed rate is the most suitable for those who want to make prudent investments. It is more expensive, yes, but it is the way to know how much you are going to pay for an investment that will accompany us much of our life.
However, the fixed rate is not available to everyone, don’t believe. A family with regular income, which does not have extras and has a limited saving capacity, could be the ideal candidate, but in this case, they may not meet the conditions required by the financial institution.
This is because fixed-rate mortgages, at best, have been around 3%, while today, there are variable rate offers to Euribor +0.75, as currently offered by Mediolanum bank. Therefore, to face a fixed-rate mortgage, more income may be needed, and therefore, a higher level of solvency.
This scenario that for the majority of homebuyers was old known until a few years ago, has been completely disrupted by the fall of the Euribor. Since this index is at negative values, banks are desperately looking for ways to reach the retail investor. Hence, they have begun to offer mortgages at a fixed rate.
Especially, if as some news of the last weeks point out, the real estate sector is experiencing a cooling due to the political uncertainty that our country is experiencing. The old Spanish adage of “Do not make changes in moving time” seems to be the maximum of the markets, as we have seen in the evolution of IBEX 35 in recent months. Remember that the stock market has accumulated falls in the months of January and February that have reached close to 18%.
Is it time for fixed rate mortgages?
Although our mission as real estate professionals does not involve economic advice, it is important that you know the ins and outs of mortgage loans. As we have been reminded of the many real estate experts who have gone through the Inmogesco real estate blog , the agent is no longer a mere transmission belt, he is a global professional who must specialize in advising a client who can return for more in the future.
With the mortgage war open, it doesn’t seem logical that anyone thinks of hiring one at a fixed rate, especially after taking a look at the available supply of variable rate mortgages. But not everything is in numbers. Do not forget that the best offers at variable interest carry all kinds of conditions and associated products.
In the best of cases, these offers require life, home and health insurance, as well as credit cards with mandatory expenses, as well as average balances that are not negligible.
This is why although mortals may seem to rain down, the reality is that in good condition, they are available only to some.
The profile of the new mortgaged is an official with savings who has left the crisis with the work intact and with some savings. We have even seen cases in which the financial institution has studied (and investigated) the financial situation of the company for which candidates for mortgages work. It is already known that having a permanent job today is no guarantee that it will be kept in the future if the company is not doing well.
Why in Europe are more fixed-rate mortgages signed?
Although a priori it seems a better idea to pay less interest and opt for a variable rate mortgage, it is surprising to know that in University Town Islamabad it is just the opposite. Our European neighbors are more proactive than us and know that it is reasonable to pay something more for the peace of mind of a fee that will not increase over time.
When choosing an interest rate, we should not be tempted to think that the situation can remain stable over time. For example, if we observe the evolution of the Euribor in the last twenty years, its average has been 2.66%, including the effect of the crisis, so that the current situation is no guarantee of anything.
If any of your clients are thinking of looking for a mortgage, remember that it is better to analyze the evolution of the Euribor as a whole, not just its behavior at present or in recent months.
So that you can analyze all these strange market phenomena, our design team has prepared an infographic with all the necessary data. We would love you to share it!