Spanish mortgages are no longer among the cheapest in Europe. The average interest rate in September was 1.94%, slightly above the euro zone average of 1.79% and higher than Germany (1.86%), France (1.51%) and Italy (1.79%), according to European Central Bank figures.
This suggests that there may be some room for competition, now that the Spanish government is forcing lenders to pay a mortgage tax that had been levied on borrowers until now. The question of who should put up with this cost has proven highly divisive, and caused a very public fracture within Spain’s Supreme Court (see sidebar).
In my opinion, the most likely scenario is that they will increase their fees
Rubén Manso, Bank of Spain inspector
The 12-month Euribor (euro zone reference rate) is currently -0.149%, indicating that Spanish lenders could compete with one another to attract customers. When he announced a government decree to make lenders pay the mortgage tax, Prime Minister Pedro Sánchez said that a competitive market would ensure banks do not pass on the added cost to clients through higher interest rates or other fees.
Before the economic crisis, home credits were being offered at one of the lowest rates in the euro zone, only above Finland (where the average rate is now 0.88%). Fernando Zunzunegui, an expert in financial law, says that banks were attracting clients with low interest rates, but made the loan dependent on clients also purchasing more lucrative products such as home or personal insurance.
When the crisis hit in late 2007-early 2008, mortgage rates started to soar, overtaking the euro zone average until 2009. Then it fell below that mark and stayed there until 2011 as lenders fought for the few clients who were still shopping around for a home loan, explains Rubén Manso, a Bank of Spain inspector on leave and director of the consulting firm Mansolivar.
On November 7, the Spanish government reacted to the Supreme Court’s decision to make borrowers bear the cost of a controversial mortgage fee by announcing legal changes so that “Spaniards will never again pay this tax.”
“I think the Supreme Court needs to reflect on the debate that’s been created regarding its own credibility,” said Prime Minister Pedro Sánchez using unusually harsh language against the court, which had for weeks been issuing contradictory decisions on the subject of the tax.
By mid-2013, mortgage interest rates in Spain had become aligned with European ones. And from mid-2017 onwards they have slowly started to climb, reflecting an improved domestic market.
While some Spanish banks have stated that they will not pass on the new cost of the mortgage tax to their customers, the ratings agencies S&P and Moody’s issued reports last week forecasting that they will do just that. Juan Fernando Robles, who teaches banking at the Center of Financial Studies, said there is no question that lenders will recoup their money. They just might not do it in the most obvious way, i.e. by raising their mortgage interest rates.
“It might work in a more ambiguous manner: banks might recover their losses through higher rates on their loans to SMEs or the self-employed. Or higher rates for their more risky clients, so as not to lose their best ones,” says Robles.
“In my opinion, the most likely scenario is that they will increase their fees,” adds Manso.
Competition watchdogs in Spain have already said that they will remain vigilant to ensure that banks do not collude to raise their prices simultaneously. Financial sources said that other variables to take into account include Spain’s risk premium, the loan default rate, and home ownership rates.
“Spain right now has one of the highest ownership rates in the world. We could decide that it’s better for Spaniards to rent more. But we need to know what we’re doing,” says a source in the banking industry. “If the tax is not passed on, this will be felt in the loan conditions, which will get tougher: fewer people will have access to it, and in worse conditions. In the end, the price will go up indirectly by restricting the offer.”
English version by Susana Urra.