Euribor for August 2007: 4.725%

Euribor – the interest rate most commonly used to calculate mortgage payments in Spain – rose again last month to 4.725%, pushing up the cost of financing a Spanish property with a mortgage in Euros.

There have now been 24 consecutive monthly increases in Euribor, taking it to its highest level in 7 years since December 2000. Euribor is now 27% higher than it was a year ago, and 125% higher than in June 2004.

For a typical 25-year Spanish mortgage of 150,800 Euros with a rate of Euribor + 0.5%, monthly mortgage repayments will rise by 89 Euros a month to 895 Euros, adding roughly another 1,000 Euros to the annual cost of paying the mortgage. 95% of mortgages in Spain are variable rate – a much higher proportion than for most other Eurozone economies – so borrowers in Spain will bear the brunt of the rise in Euribor.

Euribor rose in August despite the massive injection of liquidity by the European Central Bank to prevent the subprime mortgage crisis in the US turning into a credit crunch in the Eurozone. A re-pricing of risk and tightening credit markets mean that Euribor can be expected to continue rising.

According to the Bank of Spain, mortgage repayments now eat up 44.8% of gross household income, well above the recommended level of 30%, and the Spanish savings bank ‘Caixa Catalunya’ estimates that average household debt is now 115% of household income, compared to 71% in the year 2000. The organisation of users and consumers (OCU) has warned that the latest increase in mortgage interest rates will “stretch households to the limit.”  But mortgage delinquency rates, though on the rise, are still close to historic lows.

Many mortgage analysts expected Euribor to keep rising in the second half of the year, though at a slower rate. However, after recent turmoil in the credit markets the ECB may hold base rates at the present level, which could lead to Euribor to stabilise.

The holiday home market will be the first to feel the pinch from rising mortgage rates. Financially stretched Spanish households will abandon the holiday home, or plans to buy one, before defaulting on the main home. The Spanish are the biggest buyers of holiday homes on popular Spanish coasts, so rising interest rates are bound to have a big impact on the property market in these areas.

Base rates

Euribor is derived from the Eurozone base rate set by the governing council of the ECB during monthly meetings presided over by Jean Claude Trichet – President of the ECB. The ECB raised base rates from 3.5% to 3.75% in March, and then by a further quarter point to 4% on 6 June, but then left them unchanged in July, August and September.  The ECB was widely expected to raise rates again in September, to 4.25%, but after recent turbulence in the credit markets the bank is now expected to hold rates at 4% for the time being.

© Mark Stucklin (Spanish Property Insight)