Home loans: variable rate already costs more than fixed rate

The rise in Euribor in recent months has led the mortgage market in Portugal to an unprecedented situation in the last decade, at least: in May, those who took out a loan to buy a house with a variable rate were paying more to the bank than those who fixed the rate.

According to the Bank of Portugal, new loans for owner-occupier mortgages registered an average variable rate of 4.2 per cent that month, the highest in 11 years, against an average fixed rate of 4.19 per cent applied to new contracts.

Although the difference was minimal, this evolution is still relevant for a country where nine out of ten home loan contracts are associated to a variable rate. This is the reason why the tightening of the European Central Bank (ECB) is being particularly felt in Portugal, with thousands of families witnessing sharp rises in the monthly instalments they pay to the bank due to the rise in Euribor, the indexing factors used to calculate house payments. The contracts whose conditions have been revised this month have seen increases of up to 260 euros.
If this situation could lead to an increase in the interest of the Portuguese in fixing the instalment, the truth is that this is not happening.

Only 7% of home loans taken out in May had a fixed rate, despite the fact that there were fewer contracts with a variable rate (72.8%) and more families opting for a mixed rate (almost 20%) - where the rate is fixed for an initial period, and then changed to a variable rate.

In other words, despite the tightening of the ECB, the old habit has prevailed in Portugal of borrowing from the bank to buy a house with a variable rate, a tradition that has already been studied by the Bank of Portugal: Portuguese families do not want to fix the rate because it has historically been more expensive in the immediate term, and prefer to believe in the possibility of interest rates going down in the future.

Interest rates are not expected to fall until the end of the year, at least. After several years in negative terrain, Euribor rates have made an impressive leap over the past year and a half, climbing to over 3% (to over 4% in the case of 12-month Euribor), due to the central bank raising benchmark interest rates to control inflation.

Anticipating that the ECB will tighten policy, the market expects 3 and 6 month Euribor - which account for 70% of variable rate contracts in Portugal - to peak at 4% only early next year, meaning that financial conditions will continue to tighten for a few more months until they ease a little.

On the other hand, it´s not the Government´s move to force banks to make a fixed-rate mortgage offer that is pushing families towards this option.

Source: Jornal Eco