Banks reduce the weight of variable rate mortgages before the Euribor lows

Banks have encountered numerous threatening fronts in the face of the coronavirus. The potential increase in non-performing loans is compounded by the lengthening of negative Euribor expectations until at least 2031. However, banks weather this blow to their profitability with a decrease in the weight of variable rate mortgages with respect to total credit.

In this way, the damage caused to entities, for the benefit of families, by the historical lows of the Euribor is partially alleviated by the increase in the percentage of the portfolio that is at a fixed rate. Although the price of new fixed-rate operations, such as credit to companies, consumer or mortgages with a fixed interest rate, is also pressured down by the interbank rate.

The change of the AJD in mortgages penalizes low income and emptied Spain

Oscar Gimenez

The Euribor averaged -0.496% in December, a new record in monthly average, and fell below -0.5% in the last sessions of 2020, something that it is maintaining in January 2021. This month averages, so far, -0.505%, digging further into this anomaly of negative interest rates that, in reality, has been common for five years and is expected to last another decade due to the monetary stimuli to mitigate the effects of the coronavirus.

Precisely, the pandemic explains the downward trend of the weight of variable rate credit (which are generally mortgages) with respect to total credit. The percentage, according to data published on Friday by the Bank of Spain (BdE), stood at 59.3% in November, six tenths less than in October and settling below 60%, something that had not been seen since 2017 .

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The total volume of credit stood at 1,176 trillion (millions of millions), 0.8% more than the previous month and with a year-on-year increase of 2.3%. For its part, variable rate credit fell 0.3% monthly and 4.4% annually, to 696,996 million, according to BdE statistics for November.

In fact, in the historical series of the supervisor, which begins in 2001, it is the fifth month in which the weight of variable rate credit is below 60%. It happened in October and November 2020, and before it had only happened in a sequence of three months in 2017, between August and October, when there was a ‘boom’ in fixed-rate mortgages.

In that year, there was a drop from 70% to 42.4% in eight months, but the weight of variable rate credit quickly grew again. It was a bias in demand and supply towards fixed rate mortgages. Clients assumed a higher interest rate due to the risk of future hikes, which now look further away than they did then, and banks improved their portfolio performance after two years of negative rates, a period that has finally increased more than what the bankers were waiting at the time.

This time, the trend has been more sustained. Before the coronavirus, variable rate mortgages weighed between 63% and 65%, after almost two years moving the weight on this fork stably. But, with the coronavirus, the granting of mortgages collapsed due to the lack of demand and the resources of the banks were focused on credit to companies, which is normally at a fixed rate.

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Photo: Families in the center of Madrid, during Christmas.  (EFE)
Families turn to loan refinancing to overcome the covid crisis

Jorge Zuloaga

Thus, at the stroke of public guarantees through the Official Credit Institute (ICO), banks have increased the weight of credit to companies and, in addition, the weight of fixed-rate credit. In addition, within the mortgage segment, with the covid the weight of fixed-rate mortgages has increased again. In the confinement, in full collapse of the activity, among the mortgage loans that were signed, more than 50% was in this way, a percentage that has been reduced in recent months to 49% in October, according to the latest data from the Institute National Statistics Office (INE).

However, this 49% is well above the 45% of the same month a year earlier, or the 42% of January and 37% of February in the two months prior to the start of the mobility restrictions to stop the pandemic. In any case, mortgage credit plummeted with the coronavirus and has yet to recover. Although there are experts who expect a mortgage war in 2021, the short-term position of banks is to tighten credit in all branches, both for companies and families in housing and consumption.

Banks fear an increase in non-performing loans as soon as temporary measures dissipate to mitigate the ‘shock’ of the covid, such as the temporary employment regulation files (ERTE), the moratoriums or the lack of credits with ICO endorsement in the first year, and that debtors may request to extend a second year. Even so, the blackberry, for now, is controlled. In November, it stood at 4.56%, the same as the previous month. The volume of non-performing loans increased slightly, 0.7%, to 56,142 million, but in the same line as total credit.

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