New mortgage signings drop – and 54% buy homes in cash

MORTGAGE signings have dropped by nearly a fifth as a result of the greatest leap in interest rates in over 20 years – but debt defaults have not risen, despite the Euribor being at its highest since 2011.

According to the National Statistics Institute (INE), the most recent figures collated are up until the end of July, so the fall in new loans may be higher nearly two months on.

With a record number of existing mortgage holders attempting to renegotiate their loans or shop around for better deals, July 2023 saw a fall of 19% in new signings based upon the same month in 2022.

Mortgage rate rise 'sharpest in 20 years'

A total of 29,223 home loans were taken out in July, for an average home purchase price of €143,000 and a typical interest rate of 3.24% - the highest since August 2016.

This represents a decrease of nearly 7,000 on last July, when over 36,000 new mortgages were contracted.

Back then, interest rates on home loans were on average around 1.92%.

The hike in costs to homeowners is as a result of the Eurozone interest rate, or Euribor, soaring to above 4% when, just a year ago, it was still below zero.

At present, the Euribor for September is 4.2%, having climbed by around half a percentage point since late 2022.

Spanish mortgages are reviewed annually, meaning a variable-rate mortgage is only affected by Euribor figures for the month when their 12-month revision takes place – effectively, all mortgages have a one-year fixed rate as a result.

This means not all mortgage holders will be feeling the impact of the Euribor hike yet – the dramatic rise at the end of 2022 will not have affected 100% of variable-rate loans until the start of 2024.

European Central Bank (BCE) chair Christine Lagarde – formerly head of the International Monetary Fund (FMI) – made the sharp rate increase in a bid to control inflation in the common currency area, which had already started before the Russian invasion of Ukraine but was severely aggravated as a result of it.

This means mortgages in countries using the euro have seen the steepest cost rise in two decades, since the Euribor has never experienced such sudden changes over such a short time.

Fall in new mortgages partly due to lenders' newfound caution

Mortgage signings being down in Spain is not just about affordability, or even as a result of would-be homebuyers deciding to wait until interest rates start to fall again.

Banks are now becoming much more cautious about lending due to a perceived higher risk of insolvency among customers and a bleaker macro-economic scenario.

As a result, the percentage of mortgage applications refused by lenders has increased.

Also, the sum borrowed has seen a steady climb, since property values continue to grow at a steady rate.

The average new mortgage of €143,412 sought in July is around 2.6% higher than in the same month in 2022.

Last year, fixed-rate mortgages overtook variable-rate loans for the first time in Spain's financial history, but banks are now offering fewer of these.

Whilst still in the majority – 58% of mortgages are on fixed rates – this is still the lowest percentage since April 2021, a time when the Euribor was set to remain in negative figures for another year and a half.

Home prices remain stable as cash buyers now majority

Despite home sales in Spain falling year on year by 18.5% in July, prices have only reduced by about 4.6% and do not look set for a crash any time soon.

This is because the number of buyers who do not need a mortgage continues to go up: In July 2022, a total of 49.6% of homes were sold to cash purchasers, and this figure is now over half, reaching 54% in July 2023.

A reduction in new builds, and rising prices of construction materials – largely triggered by the conflict in Ukraine – are also keeping home prices up and preventing an across-the-board drop in value.

Property market analysts believe the current trend will continue for a few months, but that the reduction in purchases will slow down by the end of the year, and home price rises will reach a ceiling.

As yet, the BCE has not given any reassurance about a possible interest rate reduction in the near future.

For Spain, this is particularly frustrating, since its own inflation rate is one of the lowest in the Eurozone, at barely 3%.