Should you take out a fixed or variable-rate mortgage right now?

As interest rates rise across the globe, and Euribor continues to increase, there has been a surge in the number of fixed interest rate mortgage loans recently approved in Spain. In this article we explore the potential options in the current market. We also consider the advantages of a fixed or variable interest rate, applying three hypothetical interest rate scenarios.  

As we correctly predicted in early April, Euribor has returned to positive territory. In fact, the benchmark interest rate for Spanish mortgages soared to 0.852% in June, its highest since August 2012 and its biggest monthly hike ever. 

Current boom in fixed-rate mortgages.

Understandably, Spanish property buyers are currently favouring fixed-rate mortgages. As we revealed in our last quarterly report, Spain is experiencing a boom in lending as buyers try to get ahead of the trend and lock in a low fixed rate. In April, 75% of mortgages approved in Spain were subject to a fixed rate. 

At Mortgage Direct, we’ve seen a similar pattern with a surge of clients asking us to source long-term fixed rate loans. They’re also keen to complete their purchase as soon as possible to secure a lowest rate on their loan. 

Fixed or variable best?

As consumers clearly believe, the latest Euribor rise is by no means the last. The European Central Bank (ECB) appears set on a path of upping interest rates as it seeks to abate inflation in the Eurozone, currently running at 8.6% (June 2022 figures). 

But does this scenario mean that variable-rate mortgages are no longer advisable? Do rising interest rates indicate that a fixed-rate loan is the better option?

We look at three scenarios of interest rate rises and examine the financial impact should you choose a fixed or variable rate:

Scenario 1 – Euribor continues to climb until 2024

This case contemplates the Euribor reaching 1.5% next year and then rising a further 0.5% to 2% in 2024. It then remains at around 2% for the remainder of the loan. 

In this scenario, let’s assume the bank quotes a variable rate today of 1.5% over Euribor (currently 1.105 at the time of writing) leaving a current rate of 2.605% which would increase to 3.105% in 2024. If the bank were to offer a fixed-rate today of 2.5% then this would clearly be the most cost-effective option.

Scenario 2 – Euribor rises sharply but then drops gradually 

The ECB could opt for quick, sharp upticks in interest rates to combat inflation, possibly as high as 2.5% in 2023. However, this rate might not be maintained to avoid possible deceleration in the Eurozone and the ECB could start to reduce rates from 2024 onwards. As a result, the Euribor could fall to 0.5% by 2027 with gradual increases afterwards. 

In this scenario, and depending on the future increases, there might only be a marginal difference between a fixed or variable-rate mortgage.

Scenario 3 – Euribor rises and falls quickly 

Another possibility is that we see a sudden spike in rates which could increase as high as 2.5% by next year, but sharper decreases back to more’ normal’ levels from 2024 onwards. 

We think this scenario is less likely at the moment. However, should the Euribor drop back to 0.5% and maintain this level for the duration of the loan, then using the interest rates applied in Scenario 1, a variable-rate mortgage would mean lower total repayments

Your mortgage in Spain

The three possibilities above are purely illustrative. The decision on whether to choose a variable or fixed-rate loan depends on the borrower’s circumstances and also on a number of unknowns beyond anyone’s control. The market is currently extremely volatile which makes things very difficult to predict, hence why so many clients are opting for the security of a fixed rate mortgage at present.

It’s also worth bearing in mind that fixed-rate products are not always available for clients earning in certain foreign currencies. However, at Mortgage Direct we work actively with banks to offer clients the best possible range of loan solutions. We also strive to protect interest rates offered throughout the mortgage process, locking in advantageous rates where it is possible to do so.

Mortgages taken out in currencies other than the currency in which you earn are considered Foreign Currency Mortgages. Changes in the exchange rate may therefore increase the equivalent of your debt. Under the Mortgage Law 5/2019 banks in Spain have introduced mechanisms to protect consumers from exchange-rate risk. For more information, please speak to us. 

Mortgage Direct, S.L. is a company registered in the Registro de Intermediarios de Crédito Inmobiliario del BdE with the nº D108.

* This article has been written by a third party not owned or controlled by Spanish Property Insight (SPI).
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