Mortgages, fixed rates, became popular. And variable costs were higher

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In the first days of April, the bond market is trying to recover the fragments of the investor flight recorded in March. This was one of the worst in history, affecting other financial sectors, including the mortgage market. In fact, last month, the Euirs index (used to determine the final interest rate on fixed installment mortgages) has begun to soar, with the 20-year rate rising from 0.85% to 1.27%. An increase of more than 40 basis points in a few weeks, and 67 basis points if calculated from 0.6% at the beginning of the year. The Euro Interbank Offered Rate (the interbank offered rate used to calculate the installments of variable mortgages from month to month) has also changed, rising from -0.56% to -0.46%. The small increment of 10 basis points may have affected the next part of those who are repaying index mortgages (although the impact is small).

A reversal after years of calm

After years of calm and record interest rate declines, the mortgage market is therefore facing a reversal phase. The bottom has been reached. The question now is not “if” interest rates will rise from their lows, but “how much” and “when”. It is best to distinguish between new aspiring borrowers (a category that includes both those who do not yet have a mortgage and those who are paying a mortgage but are interested in subrogation) and old floating rate borrowers (who must evaluate whether to seek refuge with a more expensive fixed line or adopt a wait-and-see strategy).

Market Adjustment

From the new offer, the market is recalibrating according to the trends of the Euirs index. “In March, banks topped up part of the February euro increment into their products, and further increases are expected in the first half of April”, explains Stefano Rossini, CEO of Mutuisupermarket.it. “For example, Intesa Sanpaolo has increased its fixed rate by about 40 basis points, Bnl by 20 to 40 basis points and Bper by about 20 basis points”. Thus, if until a month ago it was still possible to stipulate a fixed rate with a limited interest rate (obtained by adding the spread established by the bank to the market euro) of less than 1% (for a standard mortgage of 160,000 euros, for a property of 200,000, a loan of 80% of the house value is required), now in the best case you can get 1.37%. Those who want to save can opt for a variable rate solution, which for a loan of the same characteristics has an interest rate of 0.59%, almost 80 basis points lower than the fixed rate.

However, unlike the calm of the past few years on the Euribor side, things are also changing on the variable side. By the end of this year, 3-month Euribor futures already discount the return of this index to positive values. Over time, through the crystal ball, the same futures expect the “variable amortization multiplier” to reach 1.3% by 2024. And then remain at these levels until 2028. “It is true that in recent years futures always predicted an increase in Euribor that did not materialize, but this time the conditions for a rate hike seem quite solid and are confirmed by the statements of the President of the European Central Bank, Christine Lagarde, who actually said on March 10 that monetary policy will have to worry about responding to high inflation by postponing actions with fiscal policy to support the economy. It is no coincidence that it is at that time that the interbank interest rate linked to mortgages begins to have new upward momentum”, continues Rossini.

ECB variables

While the euro exchange rate tracks inflation more closely, the Euribor rate reflects the real prospects of the ECB rate hikes. The ball is therefore in the hands of the Frankfurt Institute, which will make its decision based on the evolution of medium-term inflation data. At the beginning of the year, the market expected 5-10 year inflation in the euro area to be 1.86%. Now expectations have risen to 2.26%. These are not alarm levels, but the situation seems optimistic at the moment (inflation rose to 7.5% in March). “In this context, those with long-term variable mortgages could evaluate the option of fixed subrogation to secure the remaining amortization for 15 to 20 years”, Rossini concludes. It is true that you have to pay higher fixed installments immediately, but if the ECB is forced to raise interest rates several times to curb inflation, the overall interest outlay could be cheaper. “