Il Governing Council of the ECB decided to increase the three reference interest rates by 25 basis points. As a result, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased respectively to 3,75%4.00% and 3.25% starting from 10 May 2023. What will be the consequences of the increase in ECB rates on mortgage payments? The comment of Fabio Femiani, mortgage manager of idealista Italy.
Interest rates and inflation
Inflation prospects continue to be too high for too long, reads the note to the monetary policy decisions of the ECB. While headline inflation has eased in recent months, underlying price pressures remain strong. At the same time, on the one hand the previous rate hikes are forcefully transmitted to the financial and monetary conditions of the euro area, but on the other hand the effects on the real economy remain uncertain.
Also in the future, therefore, the Governing Council will ensure that official rates move consistently with inflation approaching2 percent target in the medium term, remaining at suitable levels for as long as necessary.
ECB and increase in mortgage rates in 2023
With the’increase in ECB interest rateswhat will be the mortgage consequences? After the hike announced a few minutes ago by the ECB, Fabio Femiani, Mortgage Broker Operation Director of idealista/mortgagesexplains that “
the European Central Bank appears to be seeing signs that its anti-inflation measures are starting to bear fruit
and therefore believes there is no need to continue with the previous strong upward pace while continuing its upward roadmap. In this context, theimpact on the evolution of the Euribor is uncertain, as it is possible that the market will interpret that we are reaching the end of the hikes and start discounting – on long view indices (Euribor 6 and 12 months) – similar or even lower rates than the current ones”.
Interest rates on new mortgages on the rise
Although the pace of rate hikes has slowed,”
The current Euribor levels – he adds Femiani– will entail higher reimbursements for all families with variable rate mortgages
and new mortgages will continue to be significantly more expensive than they were a year ago. Having said that, we still see how some banks – due to the need to attract customers and the almost zero remuneration of deposits – continue to offer fixed or mixed mortgages at more competitive rates than variable ones, which means that they remain the options preferred by consumers” .
Calculation of the installment of a 200,000 euro mortgage, the simulation of idealista
By how much does the variable rate mortgage increase? after the ECB rate hike of 4 May 2023? Considering an example of Calculate installment on a mortgage with a thirty-year duration of €200,000 at a floating rate with 3-month Euribor + 1.50% spread:
For those who already have a mortgage:
For new mortgages (compared to 12 months ago):
Same mortgage disbursed today: installment € 1,045 (€ 1,076 with increase + 25 bps), equal to a increase of over 61% compared to the same loan disbursed in 2022.
How much will mortgages still increase
Also according to Codacons the 25 basis point increase in interest rates decided by the ECB could represent a increase from 20 euros per installment for Italian families who have taken out a variable rate mortgage.
The mortgage market, observes the association, is worth 426 billion euros in Italy and it will be necessary to wait for the next few weeks to understand how it will respond to the rise in interest rates. In recent days, the Euribor, the reference index for variable-rate mortgages, has stood at around 3.09% for 1-month loans, 3.27% for 3-month loans: if the increase decided by the ECB were to be entirely on the market, theEuribor would rise to 3.34% (that at 1 month), 3.52% at 3 months.
Considered a mid-range of variable-rate mortgage for an amount between 125,000 and 150,000 euro, for a duration of 25 years, i.e. the amount most requested in Italy by those who take out a loan for the purchase of a house, the monthly installment is therefore destined to rise between 15 and 25 euro as a result of today’s decision of the BCE. However, if we consider all the increases imposed by the European Central Bank starting from last year, the monthly payment of a variable rate mortgage will rise overall between 225 and 295 euros compared to what was paid in 2021, with increases for families including between 2,700 and 3,540 euros per year.
When will mortgage rates start to fall?
What will mortgage rates be like in 2024? To try to predict the trend of interest rates on mortgages in the coming months it must be considered that the increases in ECB rates will continue as long as inflation is expected to rise. In the note of the Governing Council of last March 16, 2023, the inflation forecasts averaged 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025. It can therefore be assumed that the maximum increase in ECB interest rates will be reached this year. In the coming months, most likely starting next year, we could start to see a drop in ECB rates, and consequently in mortgage rates.
When will there be the next ECB rate hike in 2023?
ECB rate hike decided on May 4, 2023 may not be the last. Here is the calendar of upcoming ECB meetings during which the Frankfurt institute could decide on new changes in interest rates:
- 15/06/2023
- 27/07/2023
- 14/09/2023
- 26/10/2023
- 14/12/2023