Mortgages, cheaper than ever

The real estate sector has added a wealth of positive news throughout the year. It is rebuilt, the purchase of housing has been reactivated, prices in some areas of Spain rebound and, almost most importantly, increases the funding for this activity.

All the signals detected are an unambiguous sign that the economy has taken a pulse. The situation begins to improve, although without blowing the bells because the comparison with the years of the boom is still insignificant.

A looser financing policy and a spiraling bearish Euribor have been decisive to reactivate the purchase of housing. Still, it is clear that something is changing. The Bank of Spain itself expressed it in the last economic bulletin of October.

“The criteria for granting (loans or credits from financial institutions) relaxed slightly in the case of funds earmarked for families for the purchase of housing in Spain for the first time since 2006, while they were moderately hardened in the area of the euro “. This behavior was detected in the third quarter. The reasons, according to the entity, were due to “the best expectations on economic activity in general, the increase in the solvency of the borrowers and the greater tolerance of the entities against the risk”.

All this has allowed a rebound in the demand for financing for private consumption and the acquisition of housing.

By the end of the year, the entities do not contemplate making “significant changes” in this sense, which prolongs the good news for consumers.

According to the figures collected by the Statistics Institute (INE), until last August, 163,195 housing mortgages had been granted for an amount slightly higher than 17,030 million euros. These figures are likely to exceed those recorded at the end of 2014, which were 204,302 and 20,900 million, respectively. But they are far from the figure of 1.23 million mortgages worth 185,000 million euros in 2007.

A looser financing policy applied by banks and a Euribor in a permanent downward spiral has been the determining factors to reactivate the purchase of housing.

Undoubtedly, both are a consequence of the persistence of very low official interest rates in Europe and of the measures to help inject liquidity into the markets by the European Central Bank, and which have forced the tap on the granting of loans.

In this way, the reference index for most of the mortgages that are hired in Spain, the 12-month Euribor, has been chaining minimum after minimum. Thus, at the end of October, it stood at 0.128%, the lowest level in history. In 2008, with the financial crisis, it reached a maximum of 5.93%. With this last decrease, a customer with an average mortgage -from 100,000 euros with a repayment term of 25 years- that will be revised in November, will have an annual saving of over 100 euros.

In parallel, banks have placed spreads on Euribor in unknown ratios. Just a year ago the average was over 4%; At this time, most offers are below 2%, and even 1%, as in the case of ING Direct, Liberbank, and Mediolanum.

On the hunt of the client  

 

What has hardly changed, and that must be taken into account, is that the contract of a mortgage with an entity implicitly involves a link on the part of the client. It may include the signature of an insurance, cards, deposit, pension plan or any other product that, if rejected, would raise the interest rate initially applied.

Mortgages have been contracted above the recommended, which has led to non-payment and increased unemployment There are some requirements that are inescapable, such as direct debit or minimum income in an account of the entity and also demonstrate a certain solvency.

According to the Bank of Spain, the monthly payment of the mortgage payment should not suppose more than 35% of the net income of a person; In the first quarter of 2008, this percentage reached close to 50%. These types of situations are now very much taken into account by the entity that is going to grant the loan.

The latest report of the Appraisal Society (ST) includes a real estate effort index – the number of years of full salary that a citizen needs to allocate for the purchase of a home- that puts the average in Spain in 7.4 years. In 2007, the beginning of the financial crisis, this figure was 13.4; and between 2004 and 2006, it also exceeded 10 years.

The message of all these figures is clear: mortgages have been contracted far above what is recommended, which has caused in many cases the non-payment due to the resurgence of the crisis and the increase in unemployment.

Another aspect that is currently also taken into consideration when granting a loan for a mortgage is the amount of financing- apply here. The usual thing is that the housing loan is for a maximum value of 80% of the appraisal of the property.

In recent months some entities have expanded the mortgage offered by 100% of the appraised value, but they reserve it, almost exclusively, for the homes that they themselves have in their portfolio and sell for very high solvency customers. In return, they have required a high bond.

Continuous improvement

Continuous improvement

The forecasts that are handled for the sector for the next months run through the same positive terrain. The Bank of Spain in its latest economic report states that the needs of new housing will be between 40,000 and 200.00 annual average units until 2030. They are estimates that show some improvement after the crisis but are still far from the upward phase of the cycle (600,000 homes per year between 2002 and 2008). One of the factors that will affect the purchase of a home is the demographic, with fewer births and longer life expectancy.

Within the residential real estate sector, the Bank of Spain speaks of “an incipient stabilization”. Since the end of 2014 a slight recovery is observed, and soon “some rebound effect of a certain intensity” may be detected, due to the low activity levels of recent years, he says.

As for the granting of mortgages, the future will be conditioned, in addition to the economic environment, by the situation of the European financial system and interest rates, which at some point will have to rebound, something that will condition the Euribor and spreads. You must keep this in mind if you are going to sign a mortgage now.