Euribor (12 months), the interest rate normally used to calculate mortgage payments in Spain, fell from 2.1% in February to 1.909% last month, a change of -10.6%. Euribor has never been this low, and is almost 60% below a year ago.
That means cheaper Spanish mortgages for everyone, right? Not necessarily.
For a start, average mortgage rates for new borrowers are actually climbing in Spain, as explained recently here: mortgage interest rates rise whilst Euribor falls.
This shouldn’t surprise anyone. Banks are desperate to rebuild their balance sheets, and one way to do that is by earning bigger profits on their mortgage loans.
But there is even bad news for people who already have annually resetting mortgages tied to Euribor.
In theory, their mortgage payments should be plummeting along with Euribor. For example, monthly repayments on a typical, annually-resetting mortgage (150,000 Euros, 25 years, Euribor + 0.5%) should fall by around 220 Euros a month – a saving of 2,600 Euros a year. Borrowers with mortgages of more than 300,000 Euros should see their annual payments fall by 5,000 Euros.
But, in reality, some existing borrowers are complaining that their payments haven’t fallen at all, and in some cases have actually risen. The reason for this, as usual, is buried somewhere in the small print of their mortgage conditions. The small print on many mortgage contracts is also starting to reveal nasty surprises for borrowers, such as interests rate ‘floors’ below which mortgage rates cannot fall.
Euribor is derived from the European Central Bank (ECB) base rate, which is currently at 1.5%. Jean-Claude Trichet, President of the ECB, has hinted that more cuts in the base rate are on the cards, which explains why Euribor is still falling.