In January, Euribor fell to 3.61%, its lowest in almost a year.
The 12-month Euribor rate fell to an average of 3.61% in January, the lowest in almost a year. The benchmark index for most loans has fallen just a few cents since December and is above its level in the first month of 2023, when it rose to 3.337%. That is, in February it will continue to issue mortgage loans at floating interest rates, which are revised once a year at higher rates.
The same figure for shorter periods (eg 6 months) will reduce the cost of mortgages with variable interest rates (70% of the total in Spain), which will be renewed in the coming weeks. At the end of the summer, the six-month Euribor rate was close to 4%, compared with 3.8% currently. Families with these mortgages will be among the first to notice the benefits, which are expected to become widespread throughout 2024. New mortgages are due to be added in March, also for 12 months.
The fall in Euribor reflects expectations that the European Central Bank (ECB) will cut official interest rates several times this year. Although the institution’s Board of Governors, chaired by Christine Lagarde, refused at its meeting last week to predict when the first cut in the official “price” of money, on the basis of which banks set their mortgage index, will occur.
A third of variable mortgages will fall in price this first quarter
In a report published this Wednesday, the Bank of Spain estimates that for 19.5% of variable rate mortgages in our country, the monthly installment cost will decrease by at least 0.25 percentage points in this first quarter. For another 9.5%, the decline will be 0.5 points or more, according to the same forecast and in the same period.
On the other hand, the Bank of Spain also notes that a further third of households with mortgages will suffer from increases in the cost of their premiums at the beginning of 2024, as can be seen in the graph.
On the other hand, this calculation shows that just over half of companies with variable loans will see a reduction in the amount they pay in interest each month.
“In aggregate terms and given current market expectations, the transmission of the most restrictive monetary policy impulse (ECB rate hike) to interest payments on outstanding loans of households and companies at variable rates will be almost complete at the end of 2023,” explains the Bank of Spain.
“Interest payments on variable rate loans will gradually decline through 2024, stabilizing in 2025 at levels above those in effect before the rate tightening cycle,” he continues.
“There is a definite growth trajectory in fixed-rate corporate loans as they amortize because full renewals are expected, and most of these contracts were signed prior to the current rate hike cycle,” he adds. “For households, the study does not take into account the possible future dynamics of new credit transactions and assumes that households do not renew mortgages after they expire,” he continues.
“As new transactions are signed and fixed rate mortgages are repaid, the interest burden on the sector as a whole will increase. This is because fixed rate mortgages accounted for about 35% of the total mortgage balance in November 2023 as most were underwritten during a period of low interest rates,” he concludes.
These are the expectations reflected in Euribor and the Bank of Spain. But for now, the ECB remains focused on damaging the economy and threatening the labor market as a “last mile” strategy to combat rising prices (inflation), in monetary policy jargon.
“Tight financing conditions are slowing demand and this is helping to reduce inflation,” acknowledged a press release issued last Thursday after the ECB’s first Governing Council meeting of 2024. “Future decisions will ensure that their official rates are set at a sufficiently restrictive level for as long as necessary,” he says. With a “data-driven approach to determine the appropriate level and duration of restrictive covenants (for loans, mortgages…),” he emphasizes.