After a really interesting period in Spain in terms of fixed rate, long term mortgages, the banks have now decided to start increasing interest rates. Why are they doing this now? And what does it mean if you are looking at getting a mortgage in Spain within the near future?
Why are the Spanish banks increasing rates?
It can be hard to find a good reason within the market as to why the Spanish banks are increasing their lending rates. Having regular contact with several Spanish bank entities gives us a certain insight into what the reasons behind the increase are and I will discuss these below.
One of the reasons I’ve heard is the so called “Trump effect”. In reality we’re still to find out the exact effect that the presidency of Trump will have, but it indicates that the banks believe the effect will be positive for markets and thus rates is bound to go up, which they already have done in the USA over the past year. In terms of the EURIBOR (European Inter Bank Offered Rate), this is still negative (-0.106) as at February 2017, so in terms of the cost of borrowing money between the banks, this hasn’t changed much for the last couple of years. This indicates that something else must play a role in the increase in rates offered.
First, the Spanish banks have been hit hard by the ECJ sentence on floor clauses (click here for article from the FT on the subject) and before we have even seen the consequences from this ruling, another battle was opened regarding who is going to pay the costs related to the mortgage , i.e. AJD tax, the notary fee, “gestoria” and land registry (read more in our article on the matter by clicking here). This mixed with rising controversy surrounding certain indices, like e.g. IRPH are costing the banks a lot of money.
All in all the Spanish banks are finding themselves in a situation where they need to earn more money to make up for previous heavy losses. One of the ways of doing this is by increasing mortgage interest rates making them more expensive from a client perspective.
What does this mean if I’m looking at setting up a mortgage with a Spanish bank?
It means that compared to last year, your mortgage as a whole will end up being slightly more expensive. It also means that this may very well be a good time to actually get a mortgage, before they increase the rates even more as the world economy supposedly starts to recover lead by the US. Furthermore it will affect the importance of your choice between a fixed and a variable rate mortgages and let me explain why:
When the fixed rate available over 30 years is 2% and a variable is around 1.5% + EURIBOR (which has been the case recently), the difference is so small that you should only consider a variable rate on a short term. As this difference starts to increase, variable mortgages start to become more attractive and your timeframe and risk profile plays a much bigger role than previously. This is because you have to consider if it is worth paying more now to have the security throughout (fixed rate) or if the smaller monthly payment is more important to you (variable rate) – always bearing the risk in mind that it could/will change over time.
So essentially decision making in terms of what sort of mortgage you chose and this choice can be difficult. A good idea to seek the advice of a professional, like Spectrum Mortgages, to discuss your options before you make a decision. *
*disclaimer: The views and opinions expressed in this article are those of the author and not necessarily those of Spectrum Mortgages as a company.
By Christian Severinsen