Fixed-rate mortgages gaining in popularity - Is it the way forward?

With the housing market in Spain showing clear signs of recovery after seven years of recession, 'El Economista' has reported that a number of banks are trying to tempt buyers to change their habits and opt for American-style fixed-rate mortgages.

Banco Sabadell were first to promote the scheme, with mortgage rate fixed at 3.95% for 30 years. CaixaBank is now offering mortgages at 2.5% and 3% over a 10-year period. Both of these products break the mould in a country where 90% of mortgages have variable interest rates.

The one year Euribor, Spain's main reference index for variable-rate mortgages, has dropped dramatically from its 2008 rate of 5%, to just 0.3%, depriving the banks of one of its main sources of income from the 13.8 million mortgages drawn up during the housing boom decade.

"Banks have improved their balance sheets and in terms of capital are now in a better position than they were", said José Luis Martínez Campuzano, one of Citigroup's strategists, "but in a climate of low interest rates, they need to be more profitable". The European Central Bank (ECB) lowered its interest rates from 0.15% to 0.05% in September, bringing the Euribor down, and the quantitative easing  (QE) programme announced on January 22nd could keep base interest rates low for some time. Banco Sabadell is predicting that 20% of all its new mortgage business will be fixed-rate loans.

Although 30-year fixed-rate mortgages are fairly common in the USA, most Europeans opt for variable-rate loans or fixed-rate loans over a much shorter period. In Germany, the average mortgage repayment term is 12 years, whereas in the UK a fixed-rate mortgage tends to be for no more than five years.

When the real estate bubble burst at the beginning of the recession, interest rate hikes by the ECB brought many "unpleasant surprises" in their wake for those with mortgages, with the one-year Euribor rising from 2.64% (the average for the last 15 years) to a record 5.39% in July 2008. As Juan Villén, head of mortgage lending for Idealista.com pointed out: "Many people people say that low-rate mortgages are going to continue for a long time, yet history shows that the Euribor can rise very quickly at any time, and unfortunately, people's salaries don't rise at the same rate."

Some banks are lowering interest rates on their variable-rate mortgages in a bid to attract clients. BBVA is offering rates of Euribor  +1.6%, Banco Popular Euribor +1.55%, etc. "The problem with lowering interest rates is that it could lead to short to medium-term reduction in margins", explained Nuria Álvarez, an analyst with Renta 4. "This has never been a major problem in terms of bank profit margins up until now, but the risk exists".

According to Bankinter's CEO, María Dolores Dancausa, the Spanish mortgage market is going to be "enormously" competitive this year. "Mortgages are hugely profitable in the right conditions", she said, emphasising that the Spanish banks "are not going to lose their heads" when it comes to lowering mortgage interest rates.

Do you think fixed mortgage rates the way forward?

I believe that people knowing EXACTLY what their they are getting imto financially is a benefit to buyers but as normal the biggest query is how and who will promote it which depends a lot on who will benefit from these schemes

One of the barriers that remain still for the recovery of the market remains the amounts that both buyers and sellers have to in taxes when they buy or sell a property, for the buyers of a reasale property around an additional 14% of fees and tax, there must some form be a trade off here for the government by getting more people to visit Spain

There is a definate improvement in the market, more buyers, easier mortgages and even some banks offering 100% - 110% mortgages, what buyers don't check are the rates and conditions on things like insurace and mortgage settlement

But it is a buyers market, sellers are still having to reduce their expectations, in one area of Murcia there are more than 200 villas for sale within  a 3 square mile radius

There is a also a trend for people to want much more modern high tech style properties, all angles and glass with things like under floor heating but which start off at much lower prices tha the boom times

So too answer your query I don't think that it is only about the mortgage rates and terms but the complete package needs work including the costs and taxes

I am unfamiliar with UK costs and taxes on selling/buying property, what would they be in comparison back in the UK. Do you know?

Another thing that we Americans do is seek out new mortgages (refinancing the existing mortgage) for the home if the prevailing interest rates have fallen to level that it is fiscally benifical to do so.  Most banks are willing to do this because they make money on the transaction and, usually, the equity in the home is greater because the mortgage has been paid down, so there is less risk.  

My question is this:  Is this done in Spain?  

I bought my place in Barcelona in August 2012 when banks were relulctant to provide mortgages even though we paid a 41% down payment, in addition to all the fees. 

Our mortgage is variable - I would have had to pay 8% for a fixed mortgage in 2012, and the bank would not guarantee that it would be granted..  I can't remember the exact percentage we pay on the variable mortgage because we have a 'floor' of 4.25%.  As the bank was very truthful about this, I have been told we can't appeal to have the floor removed.  Is that correct? 

It is a 20 year mortgage.  

So refinancing may be good if it is allowed.  Also, should we challange the floor?  I'm still not a fiscal resident of Spain because I work part time in the US.  My spouse is Spanish and lives in Barcelona.  We commute!

I am unfamiliar with UK costs and taxes on selling/buying property, what would they be in comparison back in the UK. Do you know?

The rules / laws have just recently been changed on the amounts of stamp duty you pay when buying a house, say the house is up for sale at £220,000, the stamp duty on this amount is 2%...£4,400 to pay to the much needy government. To sell your main residence you pay no tax on any profits made. 

Stamp duty worked out like £0 — £125,000 = 0%   £125,001 — £250,000 = 2%   £250,001 — £925,000  = 5%...Up to 12% top line.

As you know if you sold through an estate agent fee's can vary, some will drop the price, some wont budge, but on this same amount house sale it's about on average 2% = £1,900.

To set up Electricity / Water / Gas / etc can be free if you argue enough, or maybe a charge, depends mostly on the company, phone / internet again could be free....If you shout loud enough.

so as people can see the UK rates are much less than the average 14% fees in Spain

Thanks Baz for that, I had no idea the difference was so great. 

so as people can see the UK rates are much less than the average 14% fees in Spain

Yes, and you also don't the tax man telling you that you paid under the going rate for the house so "We" want our cut...Well you don't very often that is.

 I do know one case where two farmers wanted each others properties, one to down size, the other to up size, so they both worked out how to drop the tax to be paid, and it's easy, and can be done on a private house sale reasonably legally, it worked up to the point they got the tax man asking questions but when confronted with both farmers legal teams they had to back down.

I think that you will find that the stamp duty is even less than that illustrated by Baz, as you only pay 2% on the amount that falls within that band ie £220,000 less £125,000 (0%band) = £95,000 at 2%. Therefore you would only pay £1900 stamp duty to the government. Last time we sold, in 2012, we only paid the estate agent 1 1/4 % so you can see that it is VERY much cheaper to buy and sell in the UK.

Yes GB45 you are correct, I forgot the 1st bit that was free of stamp duty, it is only £1,900.

My mistake.

I do try to multi task but as you can see I cant even do one thing correct.

Don't beat yourself up about it Baz. It's a new concept that will obviously save a lot of people a lot of money but may put up house prices somewhat. Even at the old rates of stamp duty in 2012 we reckoned we paid less than £10,000. to sell (just over £200,000)  buy another property, pay legal fees, agents fees, stamp duty and removal costs from Kent to Wiltshire. Quite a bargain really but everything being equal would have saved about £1000 at todays rates!