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Friday, October 7, 2022

Guide to surviving the heat of Euribor

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The dreaded spirit of Euribor returns. Escaping the rise in this index will not be easy for those with an adjustable rate mortgage, although there are ways to fight back, or at least lessen its impact. It affects thousands of people. Some have already seen this index rise in their most recent mortgage reviews (annual or semi-annual), others will do so for the remainder of the year. The 12-month Euribor, the most used indicator to calculate mortgage payments in Spain, exceeded 1% of its daily rate on June 15 for the first time in almost a decade. After six negative years, the mortgage market has turned like a sock. The index closed May at 0.287% and 0.852% in June, a 10-year high (it was 0.877% in August 2012). Of course, the increase is far from the maximum reached in July 2008 (5.393%) and not all households will suffer the change in sign.

From this historic July 2008 to this month April – INE latest data – 5,160,713 people have signed a mortgage to buy a home in Spain. The majority of pensions established between 2008 and 2016 had a variable interest rate (they eventually made up 98% of the total). Given that the average mortgage term is 30 years, it’s logical to think that the majority will keep paying it and face an increasingly expensive letter. In Trioteca they give an example of one of their customers with a mortgage of 150,000 euros over 30 years. In December 2021 he paid 450 euros; in April 2022 it was 485 euros. “What has risen and will rise is not nonsense, and if Euribor rises much more, it can get quite complicated,” says Ricard Garriga, founder of Trioteca.

But in 2016 the tide turned. Mortgage holders began opting for fixed rates and took advantage of bank offers in response to negative interest rates. Last April, fixed loans accounted for 75% of the total – they are not affected by fluctuations in Euribor. Bankinter’s research and markets department points out in its latest report that “more than half of the mortgages signed in recent years have been issued at a fixed rate, so the increase in Euribor will have a more moderate impact than on previous occasions” . This was the case, for example, with Caixabank. As of spring 2015, more than 70% of new mortgages issued by the company are fixed rate, and by 2022 that percentage has already risen to over 85%.

Euribor has started an upward trend, prompted by the European Central Bank’s (ECB) announcement that it would make a first rate hike of 0.25% this July and a second, slightly higher rate, for September. It’s the tool the agency needs to deal with high global inflation (in Spain it rose to 10.2% in June). Uncertainty has taken root in the markets and it is very difficult to predict how far the index will rise. The crystal ball is blurry than ever.

Caixabank sources estimate it will rise by 100 basis points for the full year and a further 1% in 2023, although they claim the forecast is uncertain and shouldn’t rule out that current prices may even involve some overreaction. According to the company, “The most likely scenario suggests a gradual pace of rate hikes that is digestible for the economy as it starts from very low levels.” Bankinter forecasts put it at 1.90% in December 2022 and will be 2.20% in 2023. Roberto Gómez Calvet, economics professor at the European University, doesn’t think it will rise by more than 2% or 3%. When asked whether we will see a short-term Euribor of 5% in 2008, the answer is negative. “Rising interest rates is the ECB’s first tool against inflation, but it knows that it cannot harm the population, it does not want to trap citizens because it would shoot itself in the foot,” says Gómez Calvet. Another thing is what will happen in the next 30 years that no one can guarantee.

The current surge is not overwhelming family economies for the time being, although the Bank of Spain warned a few weeks ago that the surge would entail a “greater financial strain”. The European University professor insists that “the increase in mortgage prices will mean a reduction in other spending, for example on clothing, because we cannot escape the mortgage”.

The circumstances of each mortgage are different, but there are a few ways to defend against escalating Euribor. “People who still have a long mortgage term — early to mid-term — should consider switching to fixed-rate mortgages as soon as possible because some banks will make them more expensive and others will remove them from their portfolios in the coming weeks,” says Garriga. There are practical no fixed rate mortgages below 2% – some are already exceeding 3% – and this July they will rise again, so the window of opportunity is closing.

Fernando López, director of operations at Gibobs allbanks, makes the same recommendation: “For those who have had Euribor plus 0.99% or higher for the last five or seven years, it is time to make the switch to study a fixed-rate mortgage or a mixed mortgage,” he says. In this fintech of mortgage advisors say they get fixed loans at 3.02% APR. This option is recommended for customers who are still in the first half of their loan term, as more interest is paid in the first few years.

let you love

The change can be made through negotiations with the bank itself (novation) or with another company (subrogation). “Right now there is a very fierce war to take clients from other banks; you have to let other beings love you,” says the founder of Trioteca. “The most economical operation is novation because there is no registration change,” says Milagros Masias, an analyst at Finteca who is also championing the move from variable to fixed. According to INE, from April 2021 to April 2022, 214,999 novations and 32,362 assignments of creditors were carried out in Spain.

However, Leyre López, analyst at the Spanish Mortgage Association (AHE), points out a few points: “The person with a mortgage must know that it is more or less interesting depending on the moment of the loan’s maturity in which they are Switch from floating to fixed , as the switch might involve some costs, fixed interest rates increase according to Euribor and moreover, interest on the loan is very likely to be earned if you are in the last tranche of the mortgage will not represent a significant amount”.

In the event that the variable rate person has little capital left, around 25%, the recommendation is: “stay variable because there is very little interest to be paid,” says mortgage expert Miquel Riera of the financial comparison HelpMyCash.com. In this case, it pays to save and, when things get really ugly, recoup as much as possible, either to reduce the monthly payment or to shorten the term and have less time exposure to Euribor.

A lower spread can also be negotiated. “Right now it’s relatively easy to reduce the differential as long as you have a good profile,” says Riera. According to the Finteca expert, there is a bank that offers spreads of around 0.50% to attract customers from other companies.

What is not advisable, says Miquel Riera, is to extend the return period: installments will be cheaper, but more interest will have to be paid (it will be generated for longer). The most important thing in any case, whether you already have a mortgage or are about to take out a mortgage, whether fixed or variable, is that a family’s mortgage expense does not exceed 35% of monthly income, even if the Euribor is placed at 3%, for example, advises Caixabank . It is convenient to do this calculation exercise to avoid anxiety.

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Source elpais.com

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