Fixed or variable rate , this is the eternal dilemma …
Dear friends of Mr Bank, how many times have you asked yourself this question, or have you heard anyone talk about this subject? How many articles have you already read on the subject?
As you will have understood by now, there is no single answer: the choice depends on many factors, which can be summarized in two: the predisposition to the risk of each of us and the evaluation of the trends in progress and, consequently, the forecasts on the interest rate evolution . Because one thing is certain: a scenario that a few months before can lead to a conclusion in favor of one or the other hypothesis, it is not said that it can change subsequently to make us reach the opposite decision.
Mortgages: the eternal dilemma between fixed and variable and rate forecasts
We will therefore try to give you some indication of the direction that rates could take, also in light of the latest political and economic events. Without forgetting that the topic does not only interest those who must decide to apply for a new mortgage at the bank, but also those who already have a mortgage, and maybe want to understand if it is the right time for a subrogation or, more simply, they are asking if you run the risk of having to put your wallet in the near future due to a sudden increase in the Euribor,
The recent history of the Euribo
Before asking what will happen at the Euribor , let us first remember where we are today.
The 1-month Euribor is steadily at -0.37 , for over a year now. To be precise, from July 2016 . Until a few years ago many of us would not even have considered that it could go into negative ground, today it has become almost the “normality”. For the first time, the 1-month Euribor fell below zero in March 2015 , two and a half years ago. It seems like another world, but ten years ago, in September 2007 , we find it at 4.43 . Let us remember that the duration of mortgages can be as long as twenty or thirty years, so … Be careful not to think only of “zero point” when it comes to mortgage rates!
What are the news of these days that can have an impact on rates in the medium term?
Among the most interesting news of these days surely should be considered Draghi’s position on the renewal of Quantitative Easing and the results of the German elections.
- When will the Quantitative Easing end?
- German elections: impacts on the euro and markets
The ECB is somehow “baffling” about the slowdown in quantitative easing, which clearly shows that Draghi, while acknowledging that the European economy is recovering, wants to continue supporting its growth with the tools at its disposal, among the which, of course, there are also interest rates. There does not seem to be any particular upward haste
On the other hand, however, the results of the German elections, even with the confirmation of Merkel, will probably constitute an element of discontinuity, with the probable entry of center-right forces, more critical of Merkel’s European policy than the latter’s period.
The Euribor forecasts
What do futures rates tell us today? They expect an increase, if we take the 3-month Euribor in fact, we see a 2018 still in negative territory, to resume above zero starting from the end of 2019.
In five years , in 2022 , the rate should close in December above 0.90 , to exceed the 1.0 level at the beginning of 2023 .
Of course, many things can change in five years, but it is clear that this scenario has directed many, in recent months, towards the fixed rate, both as a starting choice for a new mortgage and as a hypothesis of subrogation of a loan already stipulated at a rate variable. But is this still the trend?
The usual dilemma
Let us now try to reason in differential terms. The interest rate applied to the mortgage, as we know, is given by:
- Variable rate: Euribor + spread
- Fixed rate: IRS + spread
Therefore the interest rate applied does not depend only on the official reference rates, but also on the spreads applied by the banks, which are also indicative of their strategy.
A year ago the difference between the best fixed and variable rate mortgages was around 60 points (0.6%): around 1.6% against 1.0%.
In June 2017, this differential seems to have increased: in the face of a decrease in the Euribor, which favored a further lowering of the variable, the recovery of the IRS, due to the rise in inflation, has instead increased, although not by a lot, the fixed rate. Result, the fork between fixed and variable has risen, some observers speak of values close to 1% of differential.
This new trend, coupled with a scenario that does not seem to envisage drastic decisions by the ECB in the near future, could push someone to consider the variable rate again to enjoy its benefits at an early stage, which may not be so short.
After all, it always depends on the risk appetite …