Homeowners in Spain… on the edge of the precipice

Isabel Benito’s four-bedroom chalet in Colmenar Viejo, an airy village overlooking the mountains north of Madrid, was not the traditional home of a family living on the edge of a cliff. But the bank documents and hasty notes she keeps in her stocking bag in the living room testify to her financial stress.
Benito, 56, is worried that her variable rate mortgage payments – the typical contract for most Spanish homeowners – could soon rise from €902 a month to more than €1,300. “There’s the fear of losing your home, the fear of losing the money you’ve paid so far, all those sacrifices you’ve made. There’s a lot of fear and a lot of sadness,” she says.
This concern is shared across the Eurozone by millions of people who are awaiting a series of sharp interest rate hikes by the European Central Bank in response to rampant inflation. For families, the impact of the monetary tightening on their mortgages comes at a time when energy and food prices are taking a growing share of their budgets.
Dealing with the resulting discontent is an urgent task for political leaders – and one that is crucial for those running in elections next year such as Pedro Sanchez, Spain’s socialist prime minister, whose government is putting pressure on banks to ease the people .
Concerns in Spain are particularly acute because the community’s memory of the severe housing crisis that began when the property bubble burst in 2007, causing hundreds of thousands of evictions, financial collapse and undermining their confidence in banks is still fresh.
The Bank of Spain says that almost three-quarters of mortgage holders in Spain have contracts with floating interest rates, which are usually charged over the life of the loan. In neighboring Portugal, the proportion of flexible mortgages was just as high, but much lower in France and Germany, where fixed-rate contracts dominate.
But while the European Central Bank has raised its policy rate by 2 percentage points this year – and is expected to raise borrowing costs by another 0.5 percentage point in mid-December – the impact on Spanish homeowners will not be immediate. Most variable mortgages are linked to the 12-month Euribor rate, an interbank rate that reflects the direction markets think ECB rates are headed, as well as the margin based on the borrower’s circumstances. However, loan payments are generally only subject to adjustment once a year.
“The wolf is coming, but it’s not here yet,” says Laura Barrio of the Housing Coordination Group, a community support group.
But the biggest shock will be for those who got the last adjustment at the end of 2021 when the 12-month Euribor rate was less than 0.5 percent. It is now at 2.6 percent, as markets are betting that the European Central Bank will continue to raise interest rates from their current level of 1.5 percent. This means that in the next few weeks monthly payments will increase by more than 200 euros to 850 euros from 636 euros per family for an average loan size of 145,000 euros, a remaining term of 20 years and a standard Euribor rate plus 1 percent.
And Pablo Hernandez de Cos, the governor of the Bank of Spain, said last month that a three percentage point rise in interest rates would increase the number of stressed families – who spend more than 40 percent of their income on debt payments – to 400,000. or one family out of every seven families.
Benito, a temporary contract worker at a child care center, decided this uncertainty was very troubling and told her bank manager she wanted to convert her loan to a fixed rate loan. She was offered an interest of 2.85 percent compared to the current 0.2 percent, which would increase her monthly premiums by more than 200 euros to 1,137 euros as it would consume almost all of her salary. Her husband, who works as a crane driver, therefore has to cover everything else with his income. “If I don’t prove the interest rate now, there may come a time when I won’t be able to pay,” she says.
In light of these risks, an official at the Spanish Ministry of Economy said the ministry is in talks with banks about ways to mitigate the impact of high interest rates and expects a proposal from them “in the coming weeks”.
But banks want to set limits on who is eligible. “The measures must focus on a narrow perimeter, on the most vulnerable,” Gonzalo Gortazar, chief executive of Caixa Bank, a major lender, said last week.
But Manuel Bardos, president of consumer group Adecai, warned that in the past the criteria for relief measures had been so strict that they “required borrowers to be almost destitute”.
One of the ideas the banks use is to defer interest payments in full and add them to the amount owed at the end of the loan. Another suggests extending the mortgage term to reduce the burden of monthly payments.
However, according to Adecai Group, extending the average Spanish mortgage by five years would add €6,700 to the total interest cost.
Yolanda Diaz, one of Spain’s deputy prime ministers, said last month that what banks are providing is “inadequate”. Last week, ministers were quick to point out that major banks reported quarterly profits.
Today, the number of non-performing loans is small. The Bank of Spain said there was “reasonable doubt” about the full repayment of only 3.9 percent of all consumer debt, far from a peak of 13.6 percent in 2013. Mortgages also tend to be among the last to be accounts that people stop at. pay.
Last week, Jose Antonio Alvarez, chief executive of Santander Bank, Spain’s biggest bank, said the country was “nowhere close” to the dark days of 2008-2009. He said the time to feel anxious is when people’s sources of income are gone, but Spain has seen no increase in unemployment. Unemployment rose to 12.7 percent last quarter, a low figure for Spain by historical standards, but its labor market remains weak due to the proliferation of temporary contracts.
In Colmenar Fehu, this is a question that has a different consideration in Benito’s mind. She said: “I’m on a temporary contract. They could throw me out on the street at any moment.”

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