New rise in interest rates by the ECB. The battle against inflation is still alive: the entity wants to break it with another increase that relaxes consumption and tightens financing. And adds us to a crisis? What is assured is that those mortgaged at a variable rate and those that require financing will suffer yes or yes.
The step was taken for granted weeks ago. “The rise in prices is uncontrolled -9.9% in the eurozone- and generalized. People can do two things: spend or save/pay debts. With the rise in rates, the second is encouraged. If everyone spends less, prices decrease It was necessary yes or yes”, reviews Xavier Brun, director of the Master in Finance and Banking at UPF-BSM.
In general terms, with the rise, a flattering situation for the pockets is not looming. And the great challenge, the experts consulted agree, will be that the tightening of the nuts is effective in combating inflation and does not cause a recession before lowering prices.
Especially since inflation comes from the supply side -energy, supplies, production chains- and not so much from runaway consumption. “It is an atypical situation. The rate hike is the conventional measure, but it occurs in a situation that is not,” says Francisco Joaquín Cortés García, MBA professor at the International University of La Rioja (UNIR).
The forecast is that there will still be more increases, both at the end of the year and in 2023, when the path would slow down. How will it affect the one that has been approved today?
One of the most immediate consequences is seen in housing payments. With the rate hike, “Spain has a bigger problem compared to other European countries: mortgages,” says Sébastien Senegas, head of Iberia and Latam at Edmond de Rothschild AM.
“The ECB’s lever moves all rate references,” says Cortés about the Euribor, a great reference. The rate closed September at 2.23% and points to 2.6%-2.7% in October. By 2023 it could reach 3%. Thus, those who touch review in these months will see their payments become more expensive.
“The mortgaged will pay about 150 euros more per month,” says Cortés. About 1,800 euros per year in a mortgage of 120,000 euros, 20 years and Euribor differential 1%. “It will be a major setback in variable mortgages in the next revisions. If families already had problems making ends meet with inflation… 20% will remain at the limit of indebtedness,” warns Cortés.
In other calculations, with a Euribor of 2.62% at this point in the month, whoever has a variable of 150,000 euros at 30 years with a spread of Euribor 0.99%, his quota will increase 224.85 euros per month -2,700 euros per year- and for a loan of 300,000 euros under the same conditions, you will pay up to 5,400 euros more in the year, they report from iAhorro based on the levels at this point in the month.
The impact of the mortgage increase can spread to GDP, to the economy as a whole. According to a Brun figure, a rate hike or Euribor of one point has an impact of 0.35% of GDP because money is diverted from potential consumption to pay the mortgage.
In the case of fixed-rate mortgages, they do not have to worry about the increase, since their rate is maintained throughout the loan.
Access to finance will tighten. And they will also be more expensive. “With the probability of a recession, entities will grant fewer loans. If they do, it will be with tougher conditions,” says Brun.
It is something that in fact is already being reflected in the statistics. The Banco de España Bank Loan Survey for October shows that for the third quarter “the criteria for granting loans and the conditions applied were tightened across the board”. More in mortgages: “it was in the segment of credit to households for house purchase where the hardening would have been more pronounced”, it is specified. Something that will be reiterated until the end of the year, recognize the entities.
More costs and conditions can end up delaying decisions such as entering into a mortgage or the financed purchase of a car until there is less uncertainty.
Mortgages and loans become more expensive, but the rise in rates will not be transferred to deposits, to savings, for now. Although some Spanish entities have launched promotions to remunerate deposits, according to comparators such as HelpMyCash or Raisin, the ones that pay the best today for savings are in Italian, Czech or Slovak banks depending on the term. According to their data, profitability reaches 1.80% APR at six months, 1.20% at nine, 2.50% at one year, 2.76% at two years and 3.01% at three years .
With non-existent payments in large entities, “banks are going to try to delay the transfer of the rise in rates to the remuneration of deposits as much as possible. Something is moving, but there will be real competition when the terms of the rate hike, more in the long run,” believes Cortés. For now, no war for customers in the short term.
Those who have savings, given the lack of profitability and the gloomy outlook that is presented, can seek to make it profitable in the markets. Where?
“Investing in fixed income makes sense, the outlook is positive. You have to think about starting to invest,” they comment from Rothschild AM. In the case of the stock market, “we have to wait a little longer, with high rates the share price has to fall”. Thus, “in 2023 when rates stabilize and valuations have dropped, you can start building a portfolio,” says Senegas.
Those who think that the banking sector will be the big winner in the stock market do not have to be so sure, Brun warns. They will earn more with the rate hike, “but with the possible recession they will have to make more provisions.” The ones that will surely lose out will be growth and deep growth companies, those that are expanding and that promise great benefits in the future, such as technology companies, she points out.
