Rate tapering will start from the end of the first quarter of 2024 onwards – The reductions will be gradual with the result that the average rate in 2024 will be placed at 2.75% and 2.55% two years from now
At high levels, around 3.5% – maybe even 4% – it is estimated that the euribor will stabilize by the end of the year, following the path of the ECB’s key interest rate, which after the latest increase is now at 2.5 %. The ECB’s next increase, estimated to be another 50 points, is set for early March and this estimate is already reflected in the course of the 3-month euribor, on the basis of which all floating rate loans are priced and which moves above 2 .5%, discounting the next rise.
When will they decrease?
Based on the estimates, the de-escalation of interest rates will start from the end of the first quarter of 2024 onwards, but the reductions will be gradual with the consequence that the average interest rate in 2024 will be placed at 2.75% and 2.55% in two years from today. The rise in interest rates significantly affects all floating rate loans directly linked to euribor, with an emphasis on both business loans and mortgages, which make up around 90% of the banks’ €115 billion portfolio, but also all the loans that have been sold to funds, the amount of which amounts to 87 billion euros.
According to data from “K”, the average spread of mortgage loans managed by the funds is 2.5%-3% and after the rise in interest rates, the final interest rate is close to 5.5%. As far as the banks are concerned, despite the shift that has taken place in the last two years to fixed rate mortgages, these loans are only a small part of the banks’ portfolio and only concern new disbursements.
Thus, the majority of loans are significantly burdened by the rise in interest rates and the amount of the burden is a function of the time in which the loan was concluded and the margin (spread) applied over the base interest rate. For their part, the banks point out that the majority of mortgages in the 2000s, just before the bond crisis, were with low spreads of around 1.5%, as at that time, with the great explosion of demand, the conditions of competition they had squeezed profit margins. So for these loans the final interest rate today is close to 4% and the burden is lower compared to the loans of the period after 2010, when loan spreads had risen to 3% or even 4%.
The critical factor
The installment increase is also a function of the length of the loan and whether the borrower has paid off the portion of the interest that usually accrues in most of the two-thirds of the total term. Depending on whether the loan is, say, 20 years long, in the early years one pays mostly interest and some principal (eg 10%-90%), but this balance changes as the years go by and reverses when the loan is coming to maturity. This parameter is important for the amount of the burden someone will suffer due to the rise in interest rates and according to the banks, a significant part of the loans of the past have gone through the “burnout” period of high interest rates.
It should be noted that many loans were restructured during the crisis, with a large extension of their repayment term and now the average remaining term of the housing loans that the banks have in their portfolios is 18 years. Given also that the average mortgage spread is between 220 and 280 points, the average final interest rate for mortgages, if euribor is added, is already close to 5% and so on.
The same is not true for the loans of the period after 2010, which, in addition to being priced with high spreads, have not covered most of the interest-bearing period. These loans are currently priced at close to 6%-6.5% and given that the main part of the debt has not been repaid, they also suffer the greatest burden and are the big losers of the rise in interest rates.
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