The Euribor begins to make mortgages cheaper due to its largest monthly drop in 15 years

Good news before Christmas for the burden of households with debt linked to housing. December is about to close with the largest monthly decline in the 12-month Euribor since February 2009, with a drop of 0.31 percentage points (31 basis points) on average compared to November, from 4.02% to 3.706% , according to provisional data until this Friday.

Despite the fact that most variable rate mortgages will still become more expensive this month in annual payments. The differential is still positive (68 basis points more than the 3,018% in December 2022) but the banking sector will witness the first fee reductions on loans influenced by the Euribor. Some mixed mortgages would be cheaper because they have review clauses every six months. The guide is the 12-month Euribor, at its lowest since April and is lower.

For example, ING offers through its website a Variable Mortgage (with 1 to 3 fixed years) that is indexed to the 12-month Euribor but the index is reviewed every six months, according to its website. Similarly, Openbank (Santander) also has a similar formula in its Variable Mortgage, according to the product description. There are other entities that have this type of mixed loans that have become the best sellers after the reign of fixed rates before the rate rise.

Second anniversary of the Euribor at -0.502%

However, discounts will be few in cases where they occur. For the majority, the 12-month Euribor will make their installment more expensive for the second consecutive year. With the provisional data from December, a theoretical mortgage of 150,000 euros for 25 years and a differential of 1 point over the Euribor, the monthly payment would rise from 793 to 851 euros, about 58 euros more and almost 700 euros more per year.

Although it is the smallest increase since April 2022 (22 months), the loans reviewed with December will complete two years of rising and the accumulated increase in prices is the highest in more than two decades. Specifically, the mortgage example cited above assumes that the payments will have increased by 300 euros per month in just two years or 3,600 euros per year.

The 12-month Euribor has gone from trading in negative territory (-0.502% was the monthly average two years ago) to more than 400 basis points above that level (3.7% right now). It must be remembered that the one-year inter-bank loan index registered a historic low on December 20, 2021 with a daily price of -0.518%. The normalization of interest rates has, however, caused financing conditions to tighten at an excessively abrupt speed, which has depressed the appetite for taking out a mortgage and, at the same time, has accelerated the repayments of current loans.

According to the Bank of Spain, the volume of outstanding mortgages for the purchase of housing or its rehabilitation was reduced to 497,000 million euros until October. They are almost 13,000 million less than in December 2021 when the vertical rise in interest rates to combat inflation had not yet occurred. The structure of the sector has changed radically, hence the Euribor – which is an index that is quoted every day in the markets – is the reference for seven out of ten real estate loans, but that proportion is much lower than the 90% in 2012.

When will mortgages go down?

Paradoxically, the proliferation of mixed and fixed loans will stop the expected reduction in prices for part of mortgages by 2024, so the index will be lower in the annual reviews. Bank executives placed this turning point in April or May, even summer, when they presented results in October.

The European Central Bank (ECB) has supported its speech after the last meeting on December 14 to rule out that they are now discussing potential interest rate cuts. This is how both President Christine Lagarde and Vice President Luis de Guindos expressed themselves a week ago. The reason, according to regular observers of his speeches, is that the markets have gone off on a tangent and are pricing in several rate cuts in 2024 in advance, to the point that futures point to rates of 2.5% versus 4.5%. current.