Between January and July, nearly 350,000 contracts were terminated, partly to avoid rising costs due to increased interest rates

Author: Fernando Tadeo

Source: The Objective

Mortgage cancellations have risen by 9% in the first seven months of the year. This increase comes amid a historic surge in the Euribor, which is putting significant pressure on the ability to pay variable-rate mortgages, the majority of existing ones. The latest report from the Spanish Mortgage Association (AHE) indicates that between January and July, 347,665 housing loans were terminated, compared to 319,835 in the same period the previous year.

According to financial sources consulted by THE OBJECTIVE, this rise is attributed to a dual factor. On one hand, citizens are trying to avoid the Euribor’s increase by making early full repayments of their mortgages. This is possible due to savings accumulated since the pandemic outbreak, which continue despite rising prices due to inflation following Russia’s invasion of Ukraine.

On the other hand, the sources note that a significant volume of regular loan maturities is occurring from loans granted during the real estate boom of the early 2000s, which ended with the bubble burst in 2008. In fact, this mass termination of mortgage contracts was also seen in 2021, with over 540,000 financing operations completed, a 32% increase compared to 2020.

The Cost of Variable-Rate Mortgages Rises by €200 per Month

The increase in the Euribor, which is approaching 3% compared to the negative rates at the beginning of the year, is putting many families in a difficult position. The monthly payment of an average mortgage is set to rise by about €200. This increase could be higher in the coming months if the ECB fulfills its promise to continue raising official interest rates to curb inflation in Europe.

Spain is one of the countries most affected by this new monetary policy, as compared to other countries, the mortgage portfolio is more closely linked to the Euribor. It is estimated that 70% of home loans are tied to this indicator, although a significant portion of loans in recent years has been fixed-rate.

Banks believe that the Euribor’s rise will not pose a severe problem for household finances and limit payment difficulties to a small percentage, precisely because between 60% and 70% of mortgages were fixed-rate in the past five years.

Nonetheless, negotiations are ongoing with the government to improve the support system for the most vulnerable households within the Banking Good Practices Code. It is expected that specific measures will be agreed upon this month to alleviate the financial burden on the most affected group. The entities have proposed extending repayment terms if there is a 30% increase in payments for households with annual incomes not exceeding €24,318.

Mortgage Cancellations vs. New Mortgage Registrations

Although mortgage cancellations are increasing, the number of new housing loans being taken out remains higher. In the second quarter alone, 157,000 operations were registered, a historic volume. However, experts agree that the number of new mortgages will decline due to the recession and the increase in mortgage rates as a result of rising interest rates. Additionally, the housing needs that arose during the pandemic are being exhausted, which will cool the market. “In the coming months, activity might lose some of its dynamism given the current macroeconomic situation,” states the AHE.

In new mortgages, variable rates are making a comeback as banks substantially increase the prices of fixed-rate loans. In August, according to the latest available data, variable rates represent 60% of the total mortgages written, compared to 66% in June.

Banks are attempting to promote variable rates due to the Euribor’s spiral, with attractive introductory offers. Currently, one of the most aggressive in this field is BBVA, which, after the summer break, launched the cheapest mortgages in the market, with spreads over the Euribor of 0.6%.