Mortgages become more expensive after the new increases announced by Lagarde
The European Central Bank met expectations this Thursday and announced what the market also predicted for the March meeting. The agency raised the price of money by 0.5% and anticipated the same rise for the next meeting. But at the press conference came the surprise, since the market discounted that March would be the top of the increases, but the president Christine Lagarde hinted that another increase could come in May to reach 4%. This will affect the Euribor, which has already touched 3.446%, a new maximum since 2008.
In this way, if the Euribor closes February at 3.5%, a variable mortgage of 150,000 euros contracted in 2008 with a Euribor plus 0.99% will become more expensive by 1,827 euros per year. However, Lagarde’s announcements may cause the market to react with a more significant rise in the Euribor and place it at 4%. Thus, the same mortgage would make your monthly installments more expensive by 173.96 euros, which translates into 2,087.92 euros per year.
With these data, the most probable scenario for the Euribor is to approach 4% in the short term, but she has advanced that depending on the ECB’s message in March, Lagarde announced that it will be at that meeting when they decide on the May movement. It can exceed that 4% from the third month of the year. In fact, the ECB is not expected to lower rates this year, on the contrary, we understand that the price of money will be around 3.75-4% throughout 2023, which will mean that the Euribor is above those values throughout 2023, and until inflation moderates to approximately 3%.
If the ECB’s decisions are as expected, the Euribor will be around 3.5% and 4% in this first quarter. However, with this possible anticipation of one more rise in May, the Euribor will surely go above 4% in the first months of the year.
We believe that the rise in the Euribor on values close to 4% will not only affect those already mortgaged, but will establish a “very unattractive” scenario for new mortgagees who want to do so at a fixed rate. Mainly because “the fixed rates are usually very similar to the Euribor values; and, consequently, taking out a mortgage with that differential would be an unattractive option”.
This rapid rise in the index to which most variable mortgages in Spain are referenced (a year ago it was at -0.5%) has led the Government and the banking sector to implement the Code of Good Practices for alleviate the financial burden of the most vulnerable families (with incomes of less than 29,400 euros per year). However, these measures are not neutral from an economic point of view.
In the case of deferring the debt for up to 7 years, they can make the loan more expensive by up to 16,000 euros, in an average mortgage of 100,000 over 25 years, with a Euribor +1%. The -0.1% Euribor grace period represents significant relief for 5 years, by lowering the fee from 508 euros to 211 euros, and implies an additional final cost, in terms of interest rates, of just over 1,200 euros.