Effects of the rise in interest rates on mortgages
Lately, interest rates have been rising and one of the questions we hear most at JLA Notarios is what are the effects of the increase in interest rates on mortgages and how we can help ensure they do not pay more due to these rate increases.
Interest rates and mortgages: analysis according to each case
To begin with, it is necessary to distinguish between cases where one is considering applying for a mortgage and those cases where someone already has a mortgage granted.
Interest rates if you are considering applying for a mortgage
In these cases, if interest rates continue to rise, the future mortgage will be more expensive because it will have an interest rate higher than what banks are currently offering.
In light of the possible rise in interest rates and its consequences, there are two interesting considerations you should take into account.
The first is that you can try to take out a mortgage now with the current interest rates which, although they have risen compared to a year ago, are very low from a historical perspective.
The second thing you should bear in mind is that at JLA Notarios we recommend that you request a fixed-rate mortgage or that your mortgage has at least a part at a fixed rate. This will allow you to know with certainty how much you have to pay at all times. If you want to learn more about this topic, on our blog we have an article about how to take advantage of inflation by switching your variable interest mortgages to fixed.
Interest rates if you already have a mortgage with your bank
In this case we can distinguish two situations:
You have a variable interest mortgage already signed with your bank.
If your mortgage is variable, you should know that the amount of your instalments changes according to the reference index of your mortgage. The most common is that your mortgage follows the Euribor, so if the Euribor rises, the monthly instalment of your mortgage will increase.
If you have a variable mortgage and interest rates rise significantly, your mortgage instalments will increase considerably. Our recommendation from JLA Notarios is that you consider changing your mortgage from variable interest to fixed interest, either with the same bank where you have the mortgage (requesting a novation) or by switching banks through a mortgage subrogation.
If not, in November 2022 the banking code of good practices was approved with measures to protect middle-class mortgage debtors at risk of vulnerability due to inflation. In this article, we explain what this reform consists of and how it serves to protect citizens who have to pay their mortgage from the harmful effects of inflation:
Regarding signing a subrogation with another bank, we want you to know that it can save you money every month and that it has no costs neither for notary, nor registration, nor taxes if you change banks, as the law requires that the costs of the subrogation be borne by the bank. Few people know about this possibility, so if you want to find out more, we have an article published about what mortgage subrogation is that may be valuable to you.
You have a fixed interest mortgage signed with your bank
If your mortgage is fixed, inflation may be beneficial to you. I will try to explain why you can benefit from inflation and the effects of the interest rate hike if you have a fixed interest rate mortgage.
The first thing you should know is that in the Spanish legal system debts follow a nominalist criterion. This means that you will repay the loan you received from the bank plus interest, but the loan you received is repaid nominally. That is, if you received 100,000 euros, you will repay 100,000 euros plus the corresponding fixed interest, but when there is inflation the money loses value, so those 100,000 euros, the more inflation there is, have less real value. Therefore, if your salary is updated every year with the CPI (which is common and usually happens in all employment contracts governed by collective agreements), really, although you repay the bank the same money received, what you repay has less value than what you received.
For this reason, if you have a fixed mortgage and receive a salary that adjusts to the CPI, inflation will help you reduce your debt.
What you should know is that, if you took out your fixed-rate mortgage many years ago with a very high rate, you can also talk to your bank or any other to see if they change your fixed interest rate to another lower fixed interest rate, which would save you money every month without generating any cost for you, as we explained in the previously mentioned subrogation article.
We hope to have resolved, with this article, any doubts you may have had about the increase in mortgage interest rates. If you wish, you can consult on our website the mortgage services that JLA Notarios offers.
If you have any questions, or if you want to delve deeper into the effects of the interest rate hike on mortgages, at our notary office in Barcelona we are always ready to help you on this topic and any other you may need advice on. You can also write to us at the email address bcn@jlanotarios.com or contact us through the contact form on our website.
