Mortgage rates rise, new lending falls, banks lend more to fewer people, and a judge sides with borrowers

Posted on November 1, 2010 by Mark

Euribor (12 months), the interest rate normally used to calculate mortgage repayments in Spain, finished October at 1.495%, compared to 1.42% in September, a jump of 5.3pc in a month.

On an annualised basis, Euribor was 20.3pc higher than October last year. As you can see from the chart above, it just keeps going up. That spells higher monthly payments for mortgage borrowers in Spain.

As a result of the latest increase, repayments for a typical mortgage (121,000 Euros, 26 years, Euribor +0.8) will go up by 15 Euros /month, or 180 Euros / year.

Where will interest rates go in the near-term? My guess is further up as we mutate into the next stage of the credit crisis, with out-of-control fiscal deficits and sovereign defaults on the cards. If I’m right, that means more downward pressure on average house prices (but not necessarily on prime property prices).

New Mortgage Lending

New residential mortgage lending fell again in August, by an annualised 3.4pc, following on from an annualised fall of 6.8pc in July. In other words, fewer people are taking out mortgages than last year, which inevitably depresses demand for property.

This is the fourth month in a row that new mortgage lending has fallen.

How that squares with the recent news that the Spanish property market grew by XX in August I don’t know. Very few people in Spain can afford to buy without a mortgage.

The average residential loan value in August was 121,381 Euros, up 8.5pc on last year but down 0.7pc compared to July. That means banks are lending more to fewer people, which might encourage a 2-tier property market with prime and sub-prime segments going in different directions.

Overall new residential mortgage lending was 6.096 billion Euros, down 10pc on July by up 5pc on last year.

The average new mortgage interest rate in August was 3.69pc, down 2.2pc on July and 14.2pc on last year. That makes sense if banks are lending more to fewer people with better credit scores.

Other Mortgage News – Judge Sides With Borrowers

There has been a bit of a hue-and-cry in Spain over a recent decision by a judge in Seville that mortgage interest rate ‘floors’ are abusive clauses and therefore illegal.

A floor is a clause that allows lenders to set a lower limit for the interest rates that comes into force if Euribor falls below that limit. It protects lenders from ultra-low Euribor rates, in the same way that ‘ceiling’ clauses protect borrowers from ultra-high rates.

The judge said that ceilings tend to be unrealistic, often in the 10pc to 15pc range, whilst floors are much easier to trigger, often in the 2.75pc to 3.25pc range. Euribor has been below this range since 2009. These clauses work disproportionately in favour of lenders, argued the judge.

The ruling came from a lower court in Andalucia, and banks in the case like BBVA plan to appeal. A final decision could take years to emerge.

But at least it gives borrowers who have discovered floors in the small print a glimmer of hope.