Finance

Interest rates fall: how it affects your mortgage, consumption and savings

The European Central Bank (ECB) has made the change in monetary policy official and has announced a drop in interest rates in the eurozone of 25 basis points, the first since March 2016. A movement that puts an end to the period of 10 consecutive increases between July 2022 and September 2023.

Following this decision, the price of money will be at 4.25% as of June 12 , while the interest rates on the marginal credit facility and the deposit facility will be reduced to 4.50% and 3.75%, respectively. It is the first time in history that the institution lowers rates before its American counterpart (Federal Reserve).

Interest rate cuts have a direct impact on mortgages already signed, new financing and savings. However, experts assure that this drop will have a limited impact, since it is only 25 basis points, and was already discounted in the 12-month Euribor. A slight reduction in interest on new financing is expected, whether for consumption or home purchases, and a decrease in the profitability offered by financial products, such as deposits and accounts.

Now, the reductions in the installments of variable mortgages and the lowering of new loans could become more evident in the coming months, if inflation maintains its downward trend and gives free rein to the Guardian of the euro to announce more cuts. of types.

Interest rates are falling, why?
How lower interest rates affect mortgages
How the rate cut will affect new financing
Consequences of lower rates on savings and consumption
This is how the drop in interest rates influences the real estate market
Uncertainty over further ECB rate cuts in 2024
Interest rates are falling, why?
The ECB’s decision to lower interest rates has not taken the market by surprise. In the March and April meetings, the monetary authority had already hinted that it could announce this movement at the June meeting. In recent weeks, in addition, several heavyweights of the organization have defended the rate reduction , among whom are the vice president himself, Luis de Guindos; the institution’s chief economist, Philip Lane; or the governor of the Bank of France and member of the Governing Council, François Villeroy de Galhau.

The downward trend in inflation already justified a lowering of interest rates in the eurozone, considered “appropriate” at this time, as defended by the president of the ECB, Christine Lagarde.

According to the community statistics office (Eurostat), the advanced inflation rate stood at 2.6% in May in the common currency area, two tenths higher than in April, with Belgium (4.9%), Croatia (4.3%), Portugal (3.9%) and Spain (3.7%) as the countries that have recorded the largest price increases.

The ECB currently insists that monetary policy will remain restrictive for the remainder of the year, anticipating that there will not be large additional reductions in interest rates at least until 2025. The market is currently betting on a maximum of two more reductions. in the second half of the year, as long as the disinflation process in the eurozone continues.

At the press conference following the meeting of the Governing Council, President Christine Lagarde stressed that the forecast is that “inflation will fluctuate around current levels for the rest of the year” and that it will decrease towards the 2% objective. during the second half of next year, due to weaker growth in labor costs, the effects of our restrictive monetary policy and the fading impact of the energy crisis and the pandemic.”

The French president has also insisted that monetary policy will be restrictive for as long as necessary and that the decisions made by the ECB in the future will depend on economic developments, maintaining the usual “data-pending” approach of recent months. . And the update of its macro picture brings an upward revision of inflation, which could close the year at 2.5% in the general rate and drop to 2.2% in 2025; and 1.9% in 2026.

With this scenario on the table, this historic appointment by the Guardian of the euro has ended without clear clues as to when more interest rate cuts will arrive.

How lower interest rates affect mortgages
The drop in interest rates in June will not bring great news for those who have a variable mortgage referenced to the 12-month Euribor. The reason is that the indicator has already anticipated this movement and has given a slight respite to mortgage holders in the last two months.

The 12-month Euribor closed May with a monthly average of 3.68%, compared to 3.703% in April, reaching its lowest level since December. Thanks to this decrease, those who review the conditions of their variable mortgage will pay on average about 20 euros less per month in installments.

According to Juan Villén, general director of idealista/mortgages , “this decrease will possibly have a limited impact for consumers, because the 12-month Euribor is already discounting this decrease, even some more. From this moment, it will be interesting to see how it evolves this indicator for the rest of the year; that is, if after this drop and the ECB’s comments it remains at the current level or if it begins to discount additional drops.”

His opinion is shared by Miguel Córdoba, professor of Financial Economics at the CEU San Pablo University , who states that the rate cut will have “a small effect on family economies, slightly cutting interest on mortgages and loans.”

Córdoba insists that mortgage holders must understand that interest rate drops “only affect a part of their monthly amortization payments, since these are made up of principal and interest, and if the mortgage was contracted 15 years ago or more , the principal part is, by far, the most important, and if it is lowered by a quarter of a point, it will only affect the interest rate. For example, if 800 euros are being paid and 600 euros are principal amortization and 200 euros are interest, lowering 0.25% will mean approximately reducing the installment by only 12.5 euros, leaving you paying 787.5 euros, therefore that the illusion that mortgage holders have that interest rates will fall should only correspond to those who have recently taken out a variable rate mortgage and the interest part of the installment is higher than the principal amortization part.”

Looking ahead to the coming months, the market expects the Euribor to continue falling, although it will do so moderately and slowly.

This is what Santiago Carbó, director of Financial Studies at Funcas, believes, who states that “as long as the decreases are gradual and long-awaited, the Euribor will be discounted and accommodated without any problems. Of course, the downward trend will be moderate and the very low levels of interest rates that preceded the previous increases will not be reached. The mortgaged will notice it, but, in recent years, fixed rate contracts have grown a lot, isolated from this type of oscillations. Now, again, the variable rate ones are returning with some force.”

For his part, the economist Miguel Córdoba emphasizes that, “as long as inflation is as it is, there cannot be large falls in the Euribor, regardless of the fact that a level of this index between 2% and 3% should be normal for a stable economy. Seven years of negative interest rates have made many believe that borrowed money costs nothing, and the sooner they assume that if they take out a mortgage they have to pay interest on it, the sooner they will understand how a market economy works.

Julián Salcedo, doctor in Economics and president of the Forum of Real Estate Economists , also assumes that we will see falls in the Euribor soon, but warns: “No one expects big falls. We will hardly see it below 3% at the end of 2024, and it would not be good for it to drop below that level, at least until inflation is sustained at the target level of 2%.”

Juan José del Valle, head of analysis at the securities company Activotrade , maintains this line and emphasizes that “the impact on the mortgaged will be slow and progressive, except for unforeseen events or in the hypothetical case that the economy suffers a recession, at which time in which financing costs would be drastically reduced.”

The financial sector agrees with this forecast and rules out that the mortgage indicator falls below the 3% barrier. Ebury , the ‘fintech’ specialized in international payments and currency exchange for SMEs controlled by Banco Santander, estimates that the Euribor could be around 3%-3.5%. Meanwhile, the Funcas Panel (consensus of experts collected by the Savings Banks Foundation) places the floor of the indicator this year at 3.2% and at 2.75% in 2025. Bankinter ‘s analysis department , For its part, it sees the Euribor at around 3.25% at the end of the year and BBVA Research , at 3.3%. Taking into account the current levels of the Euribor, the forecast is that it will drop between four and seven tenths, at most.

How the rate cut will affect new financing
The drop in interest rates will make the loans granted by banks cheaper from now on, although a drastic change is not expected with respect to the conditions that are currently being applied.

“In financing for companies it will be noticeable, and it is necessary to stimulate economic activity, but in financing for individuals and the self-employed it will hardly be noticed, except for the most solvent and connected clients ,” says Julián Salcedo.

In mortgage matters, several banks have improved the conditions of their fixed mortgages in recent months, anticipating the reductions in interest rates. There are already several offers to finance the purchase of a home for 25-30 years at a fixed rate of less than 3% and everything indicates that in the coming months we could see more improvements, but as long as there are more cuts in the price of money. In that case, at the end of the year fixed mortgages could return to the market with a rate close to 2%.

Consequences of lower rates on savings and consumption
The drop in interest rates will bring lower profitability on deposits or interest-bearing accounts , which in recent months were offering attractive returns.

“Logically, it has to be reflected. Savings products will pay less interest. Although Spain has been one of the countries in Europe that has paid the least for deposits, given the banking oligopoly and the ECB’s open bar policy, this drop has to occur,” says Miguel Córdoba.

At the moment, several banks are already announcing to their clients a cut in yields and even the withdrawal of products , such as Pibank and Sabadell.

From Funcas, Carbó recalls that “savings products were still on the upward path, with increases in their remuneration that were timid at first and then more accelerated.” In his opinion, he is now entering a period of certain stability, although he does not rule out that there will be good offers if competition between banks for liquidity increases as the ECB withdraws its extraordinary aid.

Those who will benefit from the lower rates are those who “have investments in fixed income (bonds), since with the lower rates they will earn a lot in these savings instruments,” says Manuel Romera , director of the Financial Sector at IE University (IE Business School) . However, a containment is expected in the interest in new issues of Public Treasury Bills, which in recent times have broken investment records by households.

Regarding consumption, experts remember that the fact that the ECB has lowered rates before the Fed will devalue the Euribor, with the implication that this has on imports of any product or service that the eurozone has to buy in dollars. . For example, gasoline or gas.

In this sense, the economist Miguel Córdoba clarifies that “except for a prior announcement by the Fed that it will lower rates in the future, a devaluation of the euro against the dollar and even greater damage to hydrocarbon imports, which will cost us more Spaniards when we fill the gas tank or pay the gas bill. Only a part of Spaniards are mortgaged, while the vast majority pay for gasoline or the gas bill, so ‘longing’ for rates to drop is a trap that is not adequately explained. The worst tax, the worst cost for families is inflation, since we all have to eat and pay rent, if applicable, so the increase in prices affects everyone, while the cost of the mortgage It affects only a part of the group, and only a part of the fee, the interest part.”

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button