The rise in the Euribor pushes the renegotiation of mortgages to change from variable to fixed rates and avoid increases in installments

The rise of the Euribor over the last year and a half has progressively redoubled the pressure on the pockets of those mortgaged with variable rate loans. This scenario has prompted some consumers to convert their mortgages to a fixed rate, thus looking for a formula to avoid consecutive annual increases.. The Bank of Spain attributes these changes to the rise in the volume of loan renegotiations with banking entities, although in the last year the option linked to the Euribor has recovered a good part of the ground lost compared to fixed mortgages, which continue to account for the majority of firms.

The proportion of household loans renegotiated between July 2022 and June 2023 has grown by more than 44% compared to the previous year, according to the Financial Stability Report published this week by the Bank of Spain. Specifically, banks and families agreed to modify the conditions of 0.7% of the balance of credits granted from the middle of last year until the beginning of the second half of this year, which is equivalent to about 3.6 billion euros.

The increase of more than two tenths compared to the percentage registered until the middle of last year, when renegotiations did not represent 0.5% of the total volume of credits in the hands of families, contrasts with the slowdown in refinancing and loan restructuring. That is, operations to facilitate debt payment by households with economic difficulties have decreased, compared to the rise in the modifications of the conditions signed with the bank by families without recognized financial difficulties.. In this second case, however, loan renewals have also been reduced.

Specifically, the 0.7% of loans renegotiated between July 2022 and June 2023 exceeds by more than two tenths the percentage registered until the middle of last year and is more than double that recorded in the year before the pandemic, when it was barely The conditions of 0.3% of the loans granted to families were modified – although debt renewals predominated at that time -. The Bank of Spain attributes the increase in renegotiations to changes in mortgages from variable to fixed rates, “supported by the recent context of increases in interest rates.”

Euribor increases

The successive increases in interest rates agreed by the European Central Bank (ECB) – paused at the October meeting – have pushed up the Euribor, which is the main reference used to update variable mortgages in Spain. The indicator has gone from starting 2022 negative to stabilizing slightly above 4.1% in recent months – a level that has not been reached since 2008 – which has translated into increases when it comes to reviewing the monthly installments.. For example, October closed with the Euribor at an average of 4.16%, more than 1.5 points above the 2.629% registered a year ago, so those who update their monthly payment with the October Euribor will have to do facing a rise.

An average mortgage of 150,000 euros for 30 years with a spread of 0.99% will thus face an increase in the monthly payment of about 120 euros—1,440 euros more per year—. This increase is added to the one already produced after the 2022 review, when the Euribor was immersed in full escalation. The monthly payments of that same average mortgage already became more expensive in the tenth month of last year by about 225 euros per month, which represents an accumulated monthly increase of about 350 euros in two years.. These consecutive increases in prices are what, according to the Bank of Spain, would have promoted the conversion of mortgages to a fixed rate, so that the monthly bill is not subject to revisions.

In addition, the institution headed by Pablo Hernández de Cos also associates the rise in renegotiations with the reduction of costs associated with the conversion of mortgages from variable to fixed rates, which was one of the initiatives adopted within the package of measures approved by the Government at the end of November 2022 to alleviate the mortgage burden of vulnerable families. The Bank of Spain points out that the increase in mortgage renegotiation was precisely the “expected effect” of said initiative.

Far from the pandemic boom

However, despite the rebound in the conversion of loans from variable to fixed rates between July 2022 and June 2023, the volume of renegotiations remains far from the figures recorded in 2020, when households and banks agreed to modify the conditions of the loan. 1.5% of the balance of mortgage loans. At that time, the economic stoppage caused by the pandemic worsened the situation for many families and triggered novations, that is, the change in conditions of mortgage loans.

According to INE data, between March 2020 and the same month of 2021, these types of modifications multiplied by eight, going from 2,448 in the third month of 2020 to 21,570 a year later, a figure not seen since 2010.. In the last year, novations have stabilized at around 8,000 per month, to which are added subrogations—the change from one financial institution to another—. In June, for example, 2,038 mortgages were subrogated and another 8,633 were renegotiated within the same bank.

The variable rate regains strength

Despite the changes in mortgages already subscribed, the variable rate has gained ground in the last year. The proportion of loans linked to the Euribor has gone from representing 24.8% of the total mortgage loans granted for the purchase of a home in July 2022 to 42.2% twelve months later. In this way, the variable rate is recovering the strength lost in 2021, when it went from being the preferred option for the majority of Spaniards until December 2020 to hitting the floor in April of last year, when only one in four mortgages were signed at variable type. The scarcity of attractive fixed rate offers has changed the trend.

However, fixed mortgages continue to be the most subscribed in Spain. According to INE data, in August – the last month for which data is available – these represented 57.9% of the firms, with an average interest rate that grew for the seventh consecutive month to 3.54%.. In variable loans, however, the average rate remains lower. In August it fell slightly to 2.89% and has not exceeded 3%.

The ECB agreed to its first pause in just over a year of tightening monetary policy last week at its October meeting, after having agreed to ten consecutive increases that have placed interest rates in the eurozone at an unprecedented level of 4.5%. The stoppage of the monetary authority reduces the pressure on the Euribor, which in recent months has stabilized and refuses to exceed the 4.2% threshold, although the effect will not be immediate.