Real estate news

Here's how the rates that affect the calculation of mortgage installments are moving. For the first time the fixed in some cases costs less than the variable.

The first economic and then financial crisis triggered by Coronavirus broke the stock exchanges. Especially in the first phase (from February 19 to March 23) when the European price lists lost on average 40% and Wall Street (as had never happened in history) 34%. After that, the investors - starting to see a pinch of light at the bottom of the tunnel - began to focus on the "phase 2" of the political management of the pandemic, that is the partial reopening of economic activities. And this explains why the stock exchanges have recovered a part of the lost ground. In the last part of March and in the first week of April, the rebound recorded by equities is significant, exceeding 20% ??both in Europe and in the United States.

Understanding the performance and volatility of the financial markets is also decisive for those who are thinking of applying for a new mortgage, as well as for those - behavior that should follow every good borrower - are already repaying a mortgage loan but constantly monitor market rates for assess whether it is appropriate to try to change the mortgage on the go, through the renegotiation options (with the same bank) or the subrogation (by moving the contract to a new institution that offers more advantageous conditions).

Because between mortgages and exchanges, between mortgages and the economy, there is a sort of inverse relationship. In the sense that when the economy tends to worsen (scenario usually anticipated by the stock exchanges), mortgage rates tend to become more advantageous. Because the mortgage rates are constructed in such a way that the spread (decided by the bank and unchangeable until the end of the contract) is flanked by two interbank rates, subject to market volatility. For the fixed rate, banks use Eurirs indices of the same duration as the mortgage (therefore if a mortgage is 20 years old, 20 years Eurirs is taken and so on). Euribor is used as a reference point for variable rate mortgages, both in the 1-month version and in the 3-month version.

Both Eurirs and Euribors vary every day, as if they were equities. The difference between the fixed rate and the variable rate is that while in the first case the bank at the time of signing it freezes the Eurirs of that period for the calculation of the installments (and therefore the rate will remain attached to the market value of the Eurirs during the subscription phase ) in the variable rate contract, the bank is expected to recalculate the new rate each month based on the evolution of the Euribor indices.

The theory has it that when things go badly (GDP retreat or even recession in sight) central banks tend to cut rates. Furthermore, the medium to long-term inflation outlook also decreases (to which the Eurirs are linked) and this normally tends to further lower interbank rates. Including those used in the construction of mortgage amortization plans.

Fixed rate mortgages have fallen to such an extent that in some cases (although for a few basis points) they even exceed variable mortgage rates, which also orbit around similar percentages. And this is a financial paradox given that at the outset the fixed rate (incorporating a sort of insurance that protects against a future rate hike, a policy that the variable does not have by nature) should always cost a little more than the variable.

The catch (and in some cases) the overtaking in terms of the convenience of the fixed over the variable occurred because the Eurirs fell much more than the Euribor which, on the other hand, actually went up again. In more detail, the Euribor - which already in normal phases have few margins of descent since they closely follow the deposit rate set by the Central Bank (currently at -0.5%) - during this crisis increased by about 15 basis points. This is because the crisis is causing short-term liquidity stress (and Euribor is one of the rates that expresses the cost together with the US Libor) on the interbank market as liquidity (albeit abundant) has become an increasingly valuable resource. to keep companies alive in times of "lockdown".

The rise of the Euribors has meant that in April 2020, for the first time in 70 months, some variable rate borrowers saw the interest rate increase (albeit by a few euros) within the installment.

Faced with such a scenario, requests for variable rate mortgages (which already before the coronavirus) represented a residual share and not exceeding 10% of the total, are destined to decrease further. Quite trivially, if the fixed already costs less at the start or like the variable, what reason should push an aspiring borrower to expose the installment to future increases (albeit slight) of the Euribor / rate?