The rise in interest rates coupled with new lending policies from banks in housing finance is driving a notable expansion in mixed rate contracts. In fact, the latest report from the Spanish Mortgage Association (AHE), whose member institutions include Spain’s major banks, shows its market share doubling versus the previous year.
Mixed rate loans dip into both fixed and variable payments. In practical terms, they are short term loans, lasting roughly one to five years, or mid term, five to ten years, that start with a fixed rate before shifting to a variable rate. As AHE explains, this type of loan provides an option for consumers who want the security of a fixed payment in the early years while hoping that rates will fall or stabilize in the future.
The core dilemma for clients sits here: any long term contract will likely experience cycles of higher and lower rates over its life. A fixed portion guarantees a predictable but sometimes higher payment. When rates are low, variable payments may be favorable, whereas today’s rising money costs push mortgage payments higher, making fixed payments feel expensive. The mixed approach offers a fixed payment in the initial phase when more interest is paid, and the hope that later on the money cost declines, allowing variable rates to become more advantageous.
End of May this year shows mixed rate contracts accounting for 32.1 percent of all mortgage agreements, compared with 15.3 percent at the end of 2022. The resilience of this approach stands out against fixed rate loans, which previously enjoyed strong performance when money costs were near zero. Fixed rate contracts represented 61 percent in 2022, rising from 5.7 percent in 2015. In May 2023, fixed rates stood at 45.6 percent. Variable loans held 62 percent in 2015, averaging 24.6 percent in May, just above the level seen in 2022 as banks continue to rely on them amid rising rates around 4.25 percent.
Price dynamics show mixed rates as a leading pressure point
Mixed rate contracts currently carry the highest price burden among mortgage options. By the end of May, their average rate stood at 4.37 percent, higher than the 3.2 percent for fixed rates and slightly above the 3.8 percent for variable rates. Compared with the end of 2022, all three categories posted substantial increases. In that year, mixed rate loans averaged 2.81 percent, variable loans 1.91 percent, and fixed loans 1.76 percent. This shift mirrors a broader tightening in lending costs as rates rise and bank margins adjust.
Real estate assets labeled as at risk continue to decline in the first quarter of 2023, albeit at slower rates than in earlier quarters and with upside risk tied to inflation effects on the economy and monetary policy. The bad loan ratio for housing portfolios hovered at 2.3 percent, just one percentage point higher than the prior quarter and 0.6 percentage points lower than the year before. The bad debt ratio for real estate activities edged down from 3.8 percent in late 2022 to 3.4 percent in the first quarter of 2023, with a peak near 4.3 percent seen in early 2022.
Rising rates temper mortgage activity
AHE notes a shift in the pace of the mortgage market as borrowing costs move higher. In the first four months of 2023, the market averaged about 5,000 fewer mortgage transactions per month compared with the same period in 2022. Annual contracts at the start of the year fell from around 45,000 to just below the 36,000 mark by last April. In percentage terms, this represents roughly a 9.5 percent drop in activity and a 5.3 percent decline in the total value of housing loans.