Mortgages and Interest Rates Near Peak: What to Choose Now, Fixed or Variable?

In its last meeting in July, the European Central Bank unanimously decided to continue raising interest rates for the ninth time in a year, bringing the rate on main refinancing operations to 4.25%. And it might not end there. Analysts anticipate another increase in the cost of borrowing at the meetings on September 14 or October 26, likely by 25 basis points. Then, from December 2023, interest rates could begin to stabilize. Here’s what those who have already subscribed to a variable-rate loan should monitor and what the best options are for those considering taking out a mortgage now.

Mortgage: Fixed or Variable Rate?

In a simulation provided to We Wealth by Facile.it, let’s assume the mortgage amount for a 20-year term is €140,000, and the property value is €200,000. Opting for a fixed interest rate, the monthly installment would be €819 for the entire duration of the loan, considering the best online market conditions available (offered by Intesa Sanpaolo). In the case of a variable-rate mortgage, the initial installment for a loan taken out today would be €875 with Ing. For a variable rate with a cap (meaning a maximum interest rate that allows the borrower to know the maximum installment they may have to pay), it would be €932 with CheBanca!.

Source: simulation provided by Facile.it to We Wealth, data as of 8 August 2023.

Considering an amount of €250,000 for a 30-year term and a property value of €500,000, with a fixed rate, the monthly installment would be €1,134 for the entire duration of the financing with Bper. Choosing a variable-rate mortgage, the initial installment would be €1,243 with Ing, while for a variable rate with a cap, you might need to be willing to pay €1,343 in the best available option (with Chebanca!). “For prospective borrowers currently faced with the choice of a mortgage, there are not many doubts about which interest rate to subscribe to,” notes Andrea Polo, Director of Communication at Facile.it.

“According to Facile.it’s simulations, considering a €140,000 mortgage with a 20-year repayment plan (LTV 70%), the best fixed rates (APR) available online today start from 3.60%, corresponding to an €819 installment, while for a variable mortgage, the best offer starts from an APR of 4.47% and a €875 installment,” he adds. “From the data, it emerges that, at this stage, the first option to consider is the fixed-rate mortgage, which not only guarantees installment stability but is, in fact, even more advantageous than the starting installment of a variable-rate mortgage.”

Source: simulation provided by Facile.it to We Wealth, data as of 8 August 2023.

Variable-Rate Mortgage: What to Do Now

For those with an existing variable-rate mortgage, Polo continues, there are several factors to consider. “First of all, it’s important to remember that the impact of rate increases varies for each borrower, as it depends on the remaining mortgage amount and the number of installments left to pay: those who have passed the first half of the loan feel the rate hikes less because the potential increase is recalculated only on the remaining capital each time. Therefore, the closer you are to the end of the amortization plan, the smaller the effect on the installments. For those at the beginning of the amortization plan, it may be useful to ask a few more questions.” Since there is no one-size-fits-all answer for everyone, the advice is, first, to determine the maximum level beyond which the installment could become unsustainable for your financial situation, and second, to consult your credit institution or a consultant to identify the best solution based on your characteristics. “It is important, however, to always remember that to be at ease and avoid the risk of serious financial difficulties, the ratio between the installment and income should never exceed 1/3.”

ECB Towards Another Tightening? The Effect on Mortgages

Facile.it has also simulated what would happen to variable rates if a 25 basis point increase were confirmed at the next ECB meeting. Assuming again that the mortgage amount for a 20-year term is €140,000, and the property value is €200,000, the monthly payment would increase from €919 (what someone who took out a mortgage in January 2022 would pay) to €939. In the case of a €250,000 mortgage with a 30-year term and a property value of €500,000, the monthly payment would increase from €1,333 (this simulation also assumes a loan taken out in January of last year) to €1,371.

Source: Simulation provided by Facile.it to Wealth, data as of August 8, 2023.
* The simulation was done on a €140,000 mortgage over 20 years, LTV 70%, Initial Tan 0.67% (Euribor3m+1.25%), signed in January 2022; the estimate on the impact of the increase in installments does not take into account the amortization of the principal amount, an element that could vary depending on the characteristics of the mortgage.
** The simulation was done on a €250,000 mortgage over 30 years, LTV 50%, Initial Tan 0.67% (Euribor3m+1.25%), underwritten in January 2022; the estimate on the impact of the installment increase does not take into account the amortization of the principal amount, an element that could vary based on the characteristics of the mortgage

“Looking at the 3-month Euribor, in recent weeks, the index has slowed its rise, but – according to experts’ expectations (futures forecasts for Euribor updated as of August 2, 2023) – it will continue to grow until the end of the year, reaching its peak between November and December 2023, when it will touch 3.86%,” concludes Polo. “The good news is that with the start of the new year, the trend could finally reverse, so that, looking at the quotes for March 2024, it is expected that the index will drop to 3.77%, and even further to 3.58% by June 2024. From December 2023, therefore, interest rates will first stabilize and then start to decrease, presumably by the middle of 2025.”