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Date Published: 16/06/2023

Mortgage payments in Spain increase following latest ECB rate hike

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The European Central Bank has raised rates to 4% which will cost Spanish homeowners dearly

Mortgage payments in Spain increase following latest ECB rate hike

Despite the fact that the eurozone is in a technical recession, the European Central Bank (ECB) has decided to raise interest rates by another 0.25% in a desperate attempt to slow down the spiralling inflation. This is the eighth increase mortgage holders in Spain and the rest of Europe have had to suffer through in the last 12 months.

The news is even more ominous since ECB President Christine Lagarde has indicated that more rate hikes are almost certainly on the horizon, a decision that will put even more pressure on home and business owners, which currently account for 1.6 trillion euros of Spain’s colossal national debt.

Explaining the interest rates

Broadly speaking, the rate hikes correspond to the interest the ECB demands from commercial banks on their loans, which is now at 4%. When the ECB calls for higher fees, the banks pass this increase on to the customers in the form of mortgage and loan interest hikes. On the flip side, the return on savings also goes up.

However, the wider knock-on effects can be enormous: when mortgages and loan repayments become more expensive, consumers spend and invest less. Likewise, governments can’t afford to borrow as much so public spending declines. Finally, as the euro appreciates against foreign currencies, tourists are less likely to splash the cash.

All of this causes the economy to cool down, which is the ultimate goal of the ECB, since it eventually results in prices (and inflation) dropping.

How much will mortgages go up?

Mortgage interest rates are usually the first area to reflect the rate hikes and in Spain, around 4 million holders of variable-rate home loans will have to fork out extra as a result of the latest increases. Variable interest rate mortgages fluctuate with the Euribor, which depends directly on the ECB rates.

Taking a 150,000 euro mortgage over a 25 year term as an example, the rate hike will raise monthly repayments by 48%, from 585 to 865 euros per month. But it’s important to remember that this additional fee won’t be tacked on immediately, but rather at the 6- or 12-month review, while other factors also have an impact, such as the loan amount and the payment term remaining.

What does the future hold?

For those who owe the banks, nothing positive in the short term. When she announced the rate increase, Ms Lagarde was clear that another hike is planned for July, and there will probably be a few more after the summer.

"We are not where we want to be if we want to reach our goal," she said.

Rate hikes often appear to be a bit counter-intuitive, because they’re designed to calm inflation by slowing economic growth. However, with these sharp and rapid increases, the ECB runs the risk of cooling spending and investment too much and pitching the eurozone into another financial crisis.

In other news: Low-cost trains linking Spain and France get underway this summer

Image: Freepik

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