Fixed rates versus variable rates in Spain
Why should an applicant opt for a fixed rate when arranging a mortgage in Spain and for who and when is this the most appropriate product type.
Background
In Spain up until recently not all Spanish Banks offered a fixed rate product and when they did it was often very uncompetitive against the variable. In the last few months things have changed with more and more Banks offering a fixed rate portfolio at pricing that provides good value for the medium and longer term.
On average over the years only 6% to 7% of all loans in Spain have completed on a fixed rate basis demonstrating how few products were available.
Most fixed rates in Spain are for the lifetime of the loan. Only one lender offers a standard mixed/fixed solution where there is a fix for a number of years followed by a variable rate for the remainder of the term.
Fixed rate offerings
Fixed rates range from 10 years to 25 years but for the best of the fixed rates a term beyond 20 years is not possible.
It is currently possible in Spain to achieve a 20 year fixed rate Spanish Mortgage averaging around the 3% to 3.25%. The best of the 10 year fixed rates is currently 2.45%. For exceptionally good applicants, so those with very low affordability ratios and lower loan to values it may be possible to negotiate a fixed rate well below the average being offered as standard.
In December the best of the fixed rates in the UK but just for the first 10 years was 3.09%.
Why fix now.
At present Spain is an unusual situation where by a good range of fixed rates is being offered at competitive rates but it is also true that the variable rates for Spanish Mortgages, due to very low 12 month Euribor are lower still.
For a variable rate you could expect to pay around 2% above the Euribor. The 12 month Euribor for completions and reviews in January 2016 is 0.059% this means that the variable is a good 1% below the best of the fixed rates at this present time. What should be taken into account however is that the 12 month Euribor is at a historically low level and whilst it may remain this way for the foreseeable future, there is no doubt at some point it will start to rise for Spain and the rest of Europe.
Back seven years ago the Euribor peaked at 5.75% before dropping to its current level. Since inception of the Euribor as a standard index for mortgage purposes in 2002, the average level for a mortgage in Spain over that period will be nearer to 2.5%. If it can be assumed that over the longer term the market conditions will settle back to a less volatile and average conditions then total rates on variable rate product may average around the 4.5% over the life of the loan.
It is unlikely we will see fixed rates for the full term drop well below the current offerings as these reflect the current cost of funds and swap rates within the low Euribor market conditions. To fix for the full term at around 3% Seems a pretty good hedging of bets. It is not so much higher than the variable it will not take forever to reach the 3% level nor is likely to go much lower.
Benefits of fixing for foreign buyers
For overseas purchasers in Spain the other benefit a fixed rate brings is stability of payment. Given that monthly mortgage costs are affected by fluctuating exchange rates having a double whammy unnecessarily of fluctuating and possibly rising interest rates can now reasonably be avoided.
With no active re-finance market in Spain, and this unlikely to change due to costs of moving a loan and lack of interest of banks to take over another lenders loan credit, fixing into a competitive and low fixed rate for the full term provides good long term value in a market where once you complete that is what you will be paying for as long as you hold the loan.
Variable rates are only currently looking attractive because the index they float against is so low. Margins above Euribor for both nonresident and resident lending are in fact much higher than they were before the crisis. A good margin for a non resident applicant of a mortgage in Spain now is around 2% this was 1% back in the boom years.
Downsides of a fixed rate option
All variable rate products in Spain have very low early repayment penalties governed by Law. These cannot exceed 0.50% in the first 5 years and 0.25% thereafter. Most fixed rate products have an early redemption penalty of between 1.5% to 4% so considerably higher than their variable counterparts.
The fixed rate redemption penalties are often not clear at application or completion as the bank has a maximum it will charge, but this maximum may only be applied depending on the loss to the Bank at the point funds are either partially or fully redeemed. A 4% redemption figure may end up being much lower but the maximum will be written into the deed allowing the Bank to apply this level if required.
A few banks are now seeing this as a prevention to clients wanting to take up the offering and are either lowering the maximums or removing maximums and having set percentages for the lifetime of the loan.
Application for a fixed rate product
In Spain unlike other countries it may be possible to negotiate at application, on some of the terms and conditions, this is based on the quality of the application and that Banks desire to lend to the applicant. A reduction of early redemption penalties or a lower fixed rate can be achieved in certain circumstances.
Unlike the UK when you apply for a fixed rate in Spain you cannot pay an administration fee to secure your part of that fixed rate offering whilst you go through the approval and offer process. This means what you apply for may not in fact finally be what you are offered as the Banks can and have in the past changed the fixed rate offerings on a regular basis. At present there is more stability with less changes being made to the products which is helping to negate this previous issue.
If finally the fixed rate offered is not what was expected or wanted then the file can be re-underwritten on a variable rate basis but would have to go back to the risk teams for this to happen and possibly updated documentation sent at that point.
This is a minor frustration and is not the most customer friendly way of approaching a mortgage application. In volatile times it makes difficult to either recommend or apply for a fixed rate but in the current conditions of stability and few changes on a regular basis, the issue is not a major one but should be borne in mind when applying for a fixed rate product.
Overall taking into account all aspects for those applicants who think they will hold the loan for more than 5 years, who like the idea of knowing what they will pay each month every month and who do not want to be at the mercy of possible rate increases back to 2007 levels a fixed rate could be a very good choice.
When not to elect for a fixed rate
For applicants who know they want to make regular yearly overpayments, so maybe those who earn large bonuses and may wish to pay off early a fixed rate may not be the most flexible product. This is due to higher early payment penalties and the fact there is no capital allowances each year or negotiation to 0% for partial overpayments for fixed rate products is possible.
For those applicants who feel it is unlikely they will keep the property for more than a three to five year period again the benefit of a fixed rate versus paying now a lower variable rate may not be realistically felt.
Variable rate products still provide a lower rate currently, and this is likely to be the case for some months to come variable rates provide a higher level of flexibility when considering overpaying lump sums in relation to penalties that would have to be paid.
Conclusion
Whether to take a fixed rate or not, without a crystal ball, is impossible to advise on accurately. Finally much will depend on the preference of the applicant for stability of payments versus perhaps having the lowest possible rate over the life of the mortgage. The market conditions currently however suggest if you are going to look at fixed rates for your Spanish purchase now is the right time to do so.