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Back to 2023_07_03_ECO__HIPOTECA
Álvaro Bañón Irujo
Professor of Financial and Investment Management
The dizzying rise of the Euribor (the index of reference letter of practically all the mortgages with subject variable) in the last year has awakened the doubts of anyone who currently has or will need a loan mortgage. What do I do? Do I change my loan variable to a subject fixed? Do I ask for the loan mortgage I will need at subject fixed or variable?
In order to be able to respond with some solvency it is necessary to know each case, its financial reality and the offers that each one has from its financial institutions. But there are some general criteria that we can take into account. Starting by understanding the differences between subject fixed and subject variable, as well as their advantages.
The fixed subject
A fixed loan of subject has a fundamental advantage that economists value highly because it is scarce: certainty. In a world full of uncertainties, knowing now how much loan is going to pay for the next 25 years is a great advantage. An advantage that is worth money.
When a business, or a family, calculates its cost structure, having an item (generally the largest) fixed is a relief. It will be necessary to see if that quota allows to live comfortably and taking care of unforeseen events. But the mortgage will no longer be a "scare". And that, of course, has a price. In fact, for a while more will be paid with this modality than with the variable subject .
Another advantage of the fixed subject is that inflation financial aid especially for the indebted. How is this possible? Wasn't inflation bad for everything? For the one who is indebted, no. And, for the one who is indebted to subject fixed, one could say that it is almost "a blessing". Why? Essentially because with inflation it is foreseeable that incomes will go up - over the years, salaries will go up, maybe less than inflation, but they will go up - while the installment will remain fixed.
Thus, if the installment was, for example, 30% of the income, as the income rises due to inflation, it may end up being only 15% of the income. Does this happen with the variable installment? In the long run deadline, yes. But the debtor can get a lot of scares along the way, because you know how inflation is fought: with interest rate hikes.
The disadvantage of the fixed subject was already mentioned at the beginning: for several years (depending on the fixed subject agreed with the bank) you will be paying more than if the subject were variable. The mentality to have in this respect is the same as when taking out insurance: for many years we will be paying for car insurance without having used it. In the case of the mortgage, with this modality we have the certainty that in the future we will not pay more.
The subject variable
The variable subject has the advantage (especially in the short deadline) that the installment is lower than with the fixed subject , given the offers of the financial institutions. And the short or long deadline is not nonsense. A rise in the Euribor does more damage to a loan in the first years of its life, when there is still a lot to amortize.
The disadvantage of the variable rate is also evident. From one year to the next there can be a significant increase in the installments. For a mortgage with 200,000 euros and 20 years left, a rise in the Euribor of 4 points, as there has been in Spain in recent months, means paying 400 euros more per month and that can be a problem for many households.
Analysis of family finances
As we said at the beginning, it would be necessary to analyze the financial status of each person to see which modality suits them best, because in 25 years of loan mortgage rates will go through four or five cycles of ups and downs.
But what should I do right now, in June 2023: a fixed or a variable contract? Should I change my loan, or is it too late? We must bear in mind that the contracting of a mortgage loan is probably the most important financial operation for families. That is why you should not be dazzled by "first year offers" when these are generally 20 or 25 year operations. It is necessary to compare and to make numbers, many numbers.
Perhaps the most important thing is to make a profit and loss calculation based on two questions. The first one: with my income, from what point does the mortgage payment mean a problem for me? And the second one, can I live with the quota that I get with the loan at subject fixed? These are the questions that need to be answered honestly. Moreover, if a loan has more than 15 years left to run, it is not too late to ask these questions.
What's going to happen to the guys?
In the long term deadline, the answer is very easy: in 20 years rates will fluctuate. We can also state that what we have experienced in Europe and the US from 2016 to 2022, with negative interest rates, is absolutely unusual and that it will be very difficult to see something like this again. Moreover, it is not "healthy" for economies to have negative interest rates either.
The Euribor is currently around 4%. Is it high? Yes, but in 2008, for example, it was 5.3%. What do the markets say? The markets are predicting interest rate declines for 2024. These declines may accelerate if we enter a major recession, but the ECB has already warned that it will not let up in its efforts to fight inflation.
In any case, I insist that taking out a mortgage is a 20 or 25 year operation average. What happens in the next 18 months (which is the maximum that the markets predict, and they are usually wrong) is of little value for such a long period.
In addition to examining your family Economics before taking out your mortgage, do not be dazzled by good conditions for the first year: they are anecdotal in such a long operation.
If you choose the fixed subject , don't torture yourself when interest rates are lower than your loan. And of course, don't listen to your neighbors and friends when they brag about how much their monthly payment has gone down. You can be sure they won't tell you how much it goes up when interest rates go up. And they certainly won't sleep as soundly as you do.