In general, banks review mortgages every quarter or once a year and on the day of the review the bank takes the last published value of the Euribor and with this value calculates the interest that will be applied for the next update.
As is well known, the Euribor is the European interbank offer rate, that is to say, it is the interest at which the entities of the Euro zone buy and sell money to each other: the rate at which they lend money to each other.
This index is the most widely used reference in Spain to determine the interest rate of variable mortgages, which are those whose rate is made up of a differential plus an index.
If the Euribor rises, the interest rate will be higher and we will pay more expensive mortgage installments. However, if the Euribor goes down, the fees will go down.
Euribor is the main reference index used by banks to calculate mortgage payments, and this index has been rising steadily since April 2022. The provisional average for that month stands at -0.025% compared to -0.484% just a year ago.
Rising inflation and the war in Ukraine have caused interest rates to rise very significantly, making mortgages more expensive and, as a result, the financing to buy a house is now much higher than it was at the beginning of the year.
It is more than foreseeable that the Euribor, after being in negative for some years, could soon become positive if the current economic situation does not improve substantially.
It should be borne in mind that in Spain, according to data from the General Council of Notaries, around half of all real estate sales and purchases in Spain are financed through some type of mortgage loan. This percentage is similar to that of home sales in the northern area of Madrid, such as Alcobendas, Moraleja, Soto de la Moraleja and Ciudalcampo, for example.
The banks are already preparing strategies for the offer of mortgages in this context and now the fight is to see who offers the best conditions for a variable mortgage. In anticipation of the changes that are coming in the next few years, they are offering more benefits to the variable modality, given that these mortgages will be much more profitable for them as opposed to fixed rate mortgages, which in principle will be less profitable in the medium and long term for the entities.
According to recent data from the National Statistics Institute (INE), in the mortgages constituted on homes in 2021, 50.8% of the mortgages on homes are constituted at a variable rate and 49.2% at a fixed rate, which means that the market is, to date, fairly evenly distributed.
The fixed interest rate remains constant throughout the term and does not depend on external indexes. It is the ideal interest rate for mortgagors who want stability.
The variable interest rate, however, depends on a reference index (the Euribor generally, as we have already pointed out), so that when the index rises, the rate increases and if it falls, the rate is reduced.
Depending on the needs of the mortgagor and his risk tolerance, he will be more interested in a variable or a fixed mortgage.
The advantages of a fixed rate mortgage are mainly summarized as follows.
- The installments are stable: the interest of a fixed mortgage never changes, you will always pay the same installments and you will be able to plan your payments well.
- If the Euribor rises, the installments will not become more expensive, since fixed rates do not depend on this index.
On the contrary, the advantages of a variable interest rate mortgage would be:
- The installments will be lower in the short term.
- The savings when the reference rate falls are applied very quickly to the installment to be paid, especially if the revisions are quarterly or half-yearly.
- Normally, they have fewer or cheaper fees.
Buyers taking out new mortgages now could benefit for the time being from banks holding interest rates to make their offers more attractive.
We have seen that some banks have applied improvements of up to 0.10% but we also know that many, many banks have applied increases of up to 50% for fixed loans making them much less attractive. Fixed rate mortgages have gone from 0.60% to 1.7% on average according to Codacons.
We also know that the longer the term of a mortgage, the higher the interest to be paid, which mainly affects younger people who are the ones who usually ask for longer term loans (more than 25 years).
At REA we offer advice to our clients on the different financing alternatives when buying a house, trying to keep the costs associated with a real estate transaction as low as possible.