There is an increase in interest rates on mortgages – The reasons

By Leonidas Stergiou

This is probably the last time we see mortgages with floating interest rates around 2.5% and fixed interest rates around 3%. Already, the 3-month euribor, with which the majority of Greek banks’ mortgage loans are linked, has increased by 0.15 percentage points since the beginning of the year, ie from -0.57% to -0.42%. And 30% of the increase occurred on April 20, when the 12-month euribor went positive for the first time and today shows close to 0.132%.

This is an accelerating increase in money costs, which reflects inflation expectations and forecasts for interest rate hikes by the European Central Bank (ECB) in late 2022 or early 2023 by about half a unit, according to bank executives. The upward trend in bank financing costs accelerated in April, amid growing uncertainty over the war in Ukraine, the duration of the crisis and the energy crisis.

The same picture is observed in the bond market, where in almost all maturities, the yield increases between 1 and 1.5 percentage points. And the biggest increase has occurred from March until today.

Floating interest rates

Euribor affects floating rate mortgages, which are currently around 2.37%. These loans are usually priced with the 3-month euribor plus a margin that arises based on the credit rating, duration, percentage of own participation, etc. On average, this margin in the Greek market is between 1.5 and 3 percentage points. This means that if the 3-month euribor increases by 50 to 100 basis points by the end of the year, the floating interest rate of 2.37% in February will reach 2.87-3.37%.

Fixed interest rates

Similarly, in fixed rate mortgages, the cost for banks to lock in low interest rates for 10, 20 or 30 years via swap has increased significantly, as shown by the yield curves. These increases reach 150 basis points. It is therefore a matter of time before part of the cost goes to fixed interest rates that are currently hovering around 3%.

Simultaneous increase

How much floating and fixed interest rates will increase and which increase will come faster than the other, it depends on market conditions and the pressure of competition. In any case, bank executives believe that current mortgage rates – either floating or fixed – can not be maintained for long.

The same sources see increases of at least half a point soon, while the scenario for a final rise of 1 point by the end of the year or the beginning of 2023 is quite probable. floating and the constants will increase almost simultaneously.

The choice

And the choice of fixed or floating for the borrower becomes more difficult. Because the fluctuation may be lower today, but one can not predict how far it can go and how fast it can rise. For example, last April, the 12-month euribor was at -0.50% and today at + 0.13%, with the increase of 60 basis points taking place mainly in 2022 and the transition from negative to positive in April.

On the other hand, the higher the interest rates and the returns on the money and capital markets, the higher the new fixed interest rates will be. That is, the later the borrower “closes” a mortgage with a fixed interest rate, the more likely he is to find it later at higher levels.

And all this has happened without the ECB having raised its key interest rates, which remain negative at -0.50%. The market anticipates an increase in interest rates by half a unit at the end of 2022.