Isabel Benito’s four-bedroom chalet in Colmenar Viejo, an airy town with views of the mountains north of Madrid, is not the archetypal home of a family living on the edge. But the bank documents and scribbled notes she keeps in a bulging shopping bag in her living room are testament to the financial strain she is under.
Benito, 56, is worried that the payments on her variable-rate mortgage — the typical contract for most Spanish homeowners — could soon jump from €902 a month to over €1,300. “There’s fear of losing your home, fear of losing what you have paid for so far, and all the sacrifices you have made,” she says. “A lot of fear, and a lot of sadness.”
Her angst is shared by millions across the eurozone who are reckoning with a series of aggressive rate hikes by the European Central Bank in response to rampant inflation. For households, the impact of monetary tightening on their mortgages comes as energy and food prices devour an expanding share of their budgets.
Managing the resulting discontent is an urgent task for political leaders — and a make-or-break one for those facing elections next year such as Pedro Sánchez, Spain’s Socialist prime minister, whose government is pressing banks to offer relief.
In Spain the fears are especially acute because memories are fresh of the traumatic housing crisis that began when the property bubble burst in 2007, bringing with it hundreds of thousands of evictions, a financial meltdown, and a destruction of trust in banks.
The Bank of Spain says roughly three-quarters of mortgage holders in Spain have variable rate contracts, which are usually taken out for the duration of the loan. The proportion of flexible rate mortgages is equally high in neighbouring Portugal, but far lower in France and Germany where fixed-rate contracts are the norm.
Although the ECB has already raised its base rate by 2 percentage points this year — and is expected to increase borrowing costs by another 0.5 percentage points in mid December — the effect on Spanish homeowners is not immediate. Most variable mortgages are tied to 12-month Euribor, an interbank rate that reflects where markets think ECB rates are heading, plus a margin based on the borrower’s circumstances. But loan payments are generally only adjusted once a year.
“The wolf is coming, but it’s not here yet,” says Laura Barrio of the Coordinadora de Vivienda, a community housing support group.
The biggest shocks will be for those whose last adjustment was toward the end of 2021 when 12-month Euribor was minus 0.5 per cent. Now it is 2.6 per cent, as markets bet that the ECB will continue raising rates from their current level of 1.5 per cent. That means that in the next few weeks payments will rise by more than €200 a month from €636 to €850 for a household with the average loan size of €145,000, a remaining term of 20 years and a standard rate of Euribor plus 1 per cent.
Bank of Spain governor Pablo Hernández de Cos said last month that a 3 percentage point rise in interest rates would lift the number of stressed households — those spending more than 40 per cent of their income on debt payments — by 400,000 to one in every seven.
Benito, a temporary worker at a care centre for children, has already decided the uncertainty is too much and told her bank manager she wants to switch to a fixed-rate loan. She has been offered a rate of 2.85 per cent compared with her current 0.2 per cent, which will lift her monthly payments by more than €200 to €1,137 and consume virtually her entire salary. The income of her husband, a crane driver, will have to cover everything else. “If I don’t lock it in now, there may come a time when I can’t pay,” she says.
Alive to the risks, Spain’s economy ministry is in talks with the banks about how to alleviate the impact of higher rates and expects a proposal from them “in the coming weeks”, a ministry official said.
Banks want constraints on who is eligible. Gonzalo Gortázar, chief executive of CaixaBank, a big lender, said last week: “The measures should focus on a narrow perimeter, on the most vulnerable.”
But Manuel Pardos, president of ADICAE, a consumer group, warned that criteria for relief in the past have been so strict that they “required borrowers to be virtually destitute”.
One idea banks are pushing is to temporarily defer interest payments entirely and add them to the sum due at the end of the loan. Another is to extend the term of mortgages in order to reduce the monthly burden.
However, ADICAE calculates that stretching the average Spanish mortgage by five years would add €6,700 to total interest costs.
Yolanda Díaz, one of Spain’s deputy prime ministers, said last month that what the banks were offering was “not enough”. Ministers were quick to note last week that the biggest banks all reported bumper quarterly profits.
For now, the number of loans turning sour is small. The Bank of Spain says there is a “reasonable doubt” over the full repayment of just 3.9 per cent of all consumer debt, far from the peak of 13.6 per cent in 2013. Home loans also tend to be one of the last bills people stop paying.
José Antonio Álvarez, chief executive of Santander, Spain’s biggest bank, said last week the country was “nowhere near” the dark days of 2008 and 2009. The time to worry was when people’s sources of income disappeared, but Spain had not seen a material increase in unemployment, he said. Joblessness edged up to 12.7 per cent in the past quarter, a figure low for Spain by historical standards, but its labour market is still weakened by the prevalence of temporary contracts.
In Colmenar Viejo, that is another thing on Benito’s mind. “I am a contractor,” she says, “who they can throw out on to the street at any moment.”