By Vangelis Dourakis

The fourth reduction in its key interest rates in a row European Central Bankwhich have now landed at 3%, is a fact. A development that certainly relieves households with variable interest loans, as their installments are “scissored”, but the “damage” has already been done. The “rally” of interest rates that started in July ’22 has forced borrowers to pay only interest for the last two years with the capital owed to the bank remaining the same or even… larger.

Although mortgage loans in our country were “frozen” and turned into “fixed” in terms of their installments from March 2023, in reality the upward adjustments of interest rates were normally “charged” to the loan, resulting in in most cases the loan balance has increased.

Tens of thousands of euros in the “bucket” of euro-interest rates

So, without exaggeration, one could say that those who have loans with a floating interest rate are experiencing a “black” two years from July ’22: To cover the successive adjustments of the basic interest rate of the euro – those who managed to remain consistent throughout this time – they had to throw several tens of thousands of euros into the “bucket”, as after 29 months they found themselves in debt… more.

Something that is more than evident even in loans linked to Euro interest rates which were previously set in “fixed” installments.

Typical is the example of a mortgage loan of 250,000 euros, which was taken out in 2007 with an interest rate linked to that of the ECB and the Bank’s profit margin of just 0.80%.

The borrower during the period of increases of interest rates by Jean-Claude Trichet he was forced to regulate it and limit the dose.

Thus, in collaboration with his bank, he turned the installment into a “fixed” one with an agreement to readjust it every 3 years and with the interest rate remaining variable.

The balance of the loan, with its holder being consistent in paying the installments, was formed in June 2022 in the amount of 187,393 euros.

The borrower at that time had managed to pay an installment that half covered the interest, with the remaining amount “gnawing away” at the capital.

How loan balances increased for the consistent

That’s when Christine Lagarde started raising interest rates. The installment, which was paid by the borrower in question and which amounted to 513 euros, from December 2022 onwards went in its entirety to cover the increased interest.

Thus, for almost 24 months he only pays interest: Specifically, he has paid 12,312 euros, money given to cover the “broken” ECB. But it still wasn’t enough.

Because the amount of the tranche was not sufficient to cover all the increases resulting from the decisions of the Central Bank, what was “excess” went back to the capital. It is indicative that the balance of his loan from 187,393 euros in June ’22 increased to 188,389 by the first quarter of ’24 despite the fact that throughout this period he paid his installments regularly and without delay.

Thus, although he paid his installments regularly, the capital owed to the Bank “inflated” by almost 1,000 euros. In other words, as long as the Euro-interest rates do not decrease at a rapid rate, the borrowers will continue to pay interest and the outstanding principal will remain the same.