The market gives banks the opportunity to reduce the cost of mortgages in 2024

After almost two years of growth, several banks in recent weeks they began to announce small discounts in types mortgage what they sell. In fact, the number of new home loans has already declined since From 3.86% in October to 3.79% in Novemberalmost the first decline since January 2022 (when European Central Bank began to tighten monetary policy to combat escalating inflation). Behind this is the expectation that central banks will begin lower rates officially during 2024, which reduced market base rates and provided businesses with the opportunity to reduce the cost of loans.

Thus, the price of mortgage loans, in the case of mortgage loans, is formed. variable typefrom Euribor (which fell from 4.16% in October) at 3.679% December), and in the case of fixed ratebased on interests treasury bond 10 years in the market (which fell from 4% in October to current 3.25%). To these reference types is added admission to cover various expenses what it means for businesses to provide loans, and cousin among other things, risk of non-payment they assume a client.

Even more relevant is the noticeable reduction in prices for insurance which banks hire for cover losses in loans such as mortgages. Index Interest rate swap (IRS) measures the average rate on financial derivatives that banks enter into contracts to avoid losing money on their loans if market interest rates rise or fall above certain levels. It is clear that this index reflects value of money for a certain period no risk premium. Therefore, if the IRS falls, banks will have opportunity to make it cheaper mortgages that they try to sell to their customers without increasing the risk of incurring losses.

Descending Margin

In December, the five-year IRS, which the Bank of Spain uses as a benchmark, recorded a noticeable decline from 3.102% from November to 2.589%. This is by far the biggest drop since the watchdog began publishing data in October 2012. In fact, in two months the index fell by an unprecedented amount. almost 0.8 points percentage points from the high of 3.386% reached in October. As a result, it closed at its lowest level last year. from September 2022.

It can be assumed that the tax service continue to decline if the ECB starts cutting official rates this year, as it has already said, it may do so “barring another major shock.” Of course I could do it at a pace Slow down Yes, as the central bank insists, the market too optimistic about the beginning and speed of the decline cycle. President of the institution, Christine Lagardealready warned a few days ago that the first cut would “probably” occur in the summer and not in the spring, as investors had predicted.

Risk of loss

However, just because the IRS is dropping sharply doesn’t necessarily mean rates on new mortgages will be the same. He Bank of Spain warned last spring that watched paying particular attention to ensuring that new mortgages provided by institutions do not have interest rates that are too low, as he is concerned that they may cause damage banks in the future. The organization found that new loan rates increased less than prime rates increased (IRS on different terms).

A narrow differential between both types, commercially attractive for winning business, implies higher risk that the loan will result in losses for the bank if macro-financial conditions deviate from those expected at the time the loan is issued. For example, if an organization finds it more expensive than expected, will be financed by the current increase in interest rates deposits and increase in cost wholesale financing (which is provided by the ECB and company issues on the capital markets).

Narrow differential

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The Bank of Spain makes its estimates when calculating the rate every new mortgage provided -weighted by borrowed capital- regarding IRS (one year for floating rate loans and loan maturity date for fixed rate loans). Between 2004 and 2022The average difference between new mortgages and the IRS was 194.4 points basic (1944 percentage points). However, at the end of 2020 it was 218.2 basis points, at the end of 2021 it fell to 127 basis points, and at the end of 2022 it fell to just 26 basis points for the quarter. In April last year it stabilized at 24 points basics.

Banks are now in decision-making mode to what extent do they move falling market rates on the price of their new mortgages, taking into account also that retail finance (deposits) becomes more expensive. Financial sources believe that the most logical thing would be make a loan cheaper do business, but at the same time do less than the IRS cut increase the difference since it is at a historical low and represents a risk factor. But they also acknowledge that this will depend on how competition between organizations develops.

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