Mortgage base rates continue dramatic fall

Mortgage base rates continue dramatic fall

Euribor (12 months), the interest rate most often used to calculate mortgage repayments in Spain, fell to 0.74pc in September, the lowest level on record, and only the second month in its history that it has been below 1pc (the other month was August).

As the chart above makes it clear, Euribor is falling again at rates last seen in the heart of the credit crunch back in 2009. Euribor is now below even the Eurozone base rate, which stands at 0.75pc. That’s rarely happens.

Why is Euribor so low in a financial crisis like this? I confess I’m not sure. I guess because the ECB has slashed interest rates and because banks now assume they will all be bailed out if necessary, so the interbank market is really just borrowing from and lending to the Central Bank, when you boil it down.

As a consequence of the latest fall in Euribor, interest payments on a 20-year, €120,000 mortgage at Euribor +1pc will fall by €80/month, or €960/year. At least hard-pressed Spanish borrowers will be better off for now. Heaven help us when rates start to rise.

New borrowers, however, will not benefit much because banks are dramatically increasing their spreads on new loans. They will just be lucky to get a loan. The next chart shows that the average interest rate charged on new loans in July was 4.24pc, when Euribor was just 1.3pc.

Meanwhile, mortgage lending continues its collapse (outstanding mortgage lending down 8.65pc over 12 months to end July (AHE), new mortgage approvals down 17.5pc (INE)), meaning less money available to buy homes, thus falling prices. The value of the average new mortgage loan fell 10.5pc to €98,892 – the first time it has gone below €100,000 since 2003, as illustrated by the next chart.

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