interest rates are going up. In addition to the ECB’s announcement that rates would rise by 25 basis points in July and predictably by as many in September, the Fed and the Bank of England raised 75 basis points this week.
The reason is, of course, to contain inflation. But there are several affected by these rate hikes. The principal is the one with a variable rate mortgage. These central bank increases are going to go directly to take money out of the pockets of mortgage holders, and it is very important to know how far they can go.
Panic? A little, yes
First of all, the ideal is to do some simulation of how far mortgage payments can go If rates continue to rise. You have to examine the differential with the Euribor and bear in mind that the One year Euribor is going to be around slightly below or (usually) above the official ECB rate.
Let’s do some calculations with the average mortgage in Spainwhat according to the INE It stands at approximately 140,000 euros and a term of 20 years. And we are going to assume a spread with the Euribor of 1.5%.
At the beginning of the year, this mortgaged party, with the Euribor at -0.5%, paid an interest rate of 1%. And the resulting fee was 643 euros per month. With the Euribor currently at 1%, the resulting interest rate is 2.5%, leaving a fee of 741 euros per month, 100 euros more than at the beginning of the year.
But how high will rates go? It is difficult to know, but the normal thing, once the era of low rates is over, is that the rates are above inflation. We are going to make two assumptions: that inflation reacts quickly to the rise in rates or that it does not.
In the best case, the ECB will raise rates to 2% or 2.5% and thus manage to contain prices. This would give a mortgage at 4%, and a fee of 848 euros per month, 200 euros more than at the beginning of the year.
But if things get complicated, rate hikes up to 6% or 8% cannot be ruled out. In the worst case, we would be talking about a 9.5% mortgage, that is, a fee of 1,300 euros and double that at the beginning of the year. This would be, of course, total panic mode.
How believable is panic mode? At the moment little but nothing can be ruled out. The Fed has raised rates twice this year by a total of 125 basis points. The ECB is behind because it does not want to spoil the economy, but these increases could accelerate. The Euribor has risen in just six months from -0.50% to 1%. They are not factors to rule out any possibility.
Solutions to a possible rate hike
What can a mortgagee do to protect themselves? Basically having a fixed-rate mortgage. And the new mortgagees know it, since right now more mortgages are signed at a fixed rate than at a variable rate. Those who have them at a variable rate can change the type of mortgage, but the bargains that were six months ago at a fixed rate are no longer there. And today’s offers will surely not be available in six months, be careful there too.
Another possibility is to hire an insurance against the rise of the Euriborbut the study must be done well because the costs are high (we are talking about a single payment premium of several thousand euros).
The third possibility is to try to pay off early to reduce the principal. This implies that if someone has savings but would rather have them than write them off due to low interest rates, it is important have these savings ready to write off if rates continue to rise.
Of course, the important thing is to simulate each individual case and make plans in case rates continue to rise rapidly. There are scenarios where this rate hike can destroy a family economy.
Source: El Blog Salmón by www.elblogsalmon.com.
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