Facile.it’s simulation considers an adjustable-rate mortgage taken out in January 2022 with a term of 25 years, the amount of 126 thousand euros, and a loan-to-value of 70 percent
The ECB’s moves have pushed the rate of the typical variable-rate loan under consideration to 4.14 percent in April 2023, which is equivalent to a monthly payment of 675 euros
After the last interest rate hike of 50 basis points in March, the confrontation between hawks and doves in Frankfurt is rekindled. According to a recent statement by Latvian bank governor Martins Kazaks and reported by the Leta news agency, members of the European Central Bank’s Governing Council could opt for a 25 basis point increase at the May 4 meeting. If confirmed, according to Facile.co.uk simulations, it could result in a 52 percent increase in the installment of an average variable-rate mortgage compared to the beginning of last year.
Fixed or variable rate: what changes
Let’s first clarify. A fixed rate is defined as an interest rate that does not fluctuate according to trends in the financial markets; consequently, the mortgage installment remains unchanged for the entire duration of the debt repayment. The benchmark banking institution for calculating fixed-rate mortgages is the Eurirs, the interest rate swap. It depends on the performance of particular interest rate derivatives (called “swaps”) banks use to guard against potential losses. In the case of the variable rate, on the other hand, the mortgage installment varies according to fluctuations in the Euribor or the average rate of financial transactions among major European banks.
Mortgages, price increases of up to 237 euros
Facile.it’s simulation considers a variable-rate mortgage signed in January 2022 with a term of 25 years, an amount of 126 thousand euros, and a loan-to-value (the indicator that measures the amount financed concerning the property’s value to be purchased) of 70 percent. The starting Tan (the pure interest rate applied to the loan) is 0.67 percent, equal to a monthly installment of 456 euros. The ECB’s moves-successive since then in bringing inflation back to more moderate levels-have pushed the rate of the model variable-rate loan under consideration to 4.14 percent as of April 2023, which is equivalent to a monthly installment of 675 euros (219 euros more than the initial amount). And this is not the end of the story, as the trend is upward. As anticipated in the opening, the ECB will meet on May 4, and more action on the cost of money is likely to follow.
If the expected 0.25 percent increase is confirmed, Facile.it has calculated that the monthly installment of the loan under consideration could touch 693 euros, which is 237 euros more than in January 2022, when the mortgage was taken out. “While it is true that Euribor moves according to the expectations of the ECB rates, it is not certain that it will do so in a similar way, so it will be necessary to wait a little longer to understand how the installments will change in practice,” Facile.it experts point out. “It is good to remember, however, that the impact of the increases will be different for each borrower depending on the remaining amount of the loan and the number of installments still to be paid: the closer you are to the end of the repayment plan, the smaller the effect will be.”
Better fixed or variable rate?
Analyzing market expectations (Euribor futures updated to April 26, 2023), experts continue, it is estimated that the 3-month Euribor will peak in September 2023 at around 3.76 percent. In that case, the average mortgage rate would exceed 5 percent for an installment of about 737 euros. After that, however, according to expectations, this trend is expected to reverse. In June 2024, it is estimated that the 3-month Euribor will slide to 3.22 percent, pushing the monthly payment to 698 euros. But for those who still need to take out a mortgage, what rate should they choose today?
“Currently, banks are pushing fixed rates, especially long-term rates; this translates into low spreads and extremely competitive final rates. Suppose we also combine the prospect of growth in variable rates. In that case, it is clear that at this stage, the first option to be evaluated is the fixed-rate mortgage, which not only guarantees the stability of the installment but, according to the data in hand, is even cheaper than the starting installment of a variable mortgage,” state the experts at Facile.it. Always considering a 25-year mortgage, with an amount of 126 thousand euros and a loan-to-value of 70 percent, they have calculated that the best-fixed rates available online today start from 2.99 percent, equal to an installment of 597 euros for the entire duration of the financing; on the contrary, the best offer of variable rate starts from a Tan of 3.70 percent or an initial installment of 644 euros. “Of course, there is no absolute better choice than another. This is precisely why the advice is to compare the different options on the market and get help from an advisor who can direct us to the best solution for our needs,” they finally warn.
