Extraordinary rate increases driven by central bank policy and inflation led to a sharp rise in mortgage payments, lasting well into 2022. When families managed to repay portions of their loans early, they could lower monthly installments or shorten loan terms, reducing long-term interest. Recently, the trend toward faster amortization was described as finished by Margarita Delgado, Deputy Governor of the Bank of Spain.
Spanish households allocated depreciation between ordinary and extraordinary values. The figure for last year reached 65.839 million euros, representing over 32% of the annual average of 49.746 billion euros between 2018 and 2021. This occurred four years before the ECB began raising rates to curb inflation. Yet last year’s depreciation rose only 0.4% above 2022. The acceleration in depreciation mainly took place in the second quarters of 2022 and 2023. It began to ease last summer, with the autumn and winter quarters showing a slowdown compared with the same period a year earlier, just before the ECB tightened monetary policy.
The Bank of Spain confirmed this shift in trend. In 2022 and much of 2023, depreciation occurred at a very dynamic pace, reaching March with a 34.8% higher level than the average observed from 2019 to 2023. As interest rates rose, households lost part of their discretionary income andSavings to cover depreciations and partially amortize mortgages, cushioning the impact of higher rates. However, that accelerated depreciation rate is already easing, indicating that the intense amortization phase is ending and current levels are close to the five-year average, according to the lieutenant governor.
More than in the euro area
Another way to confirm the trend is the recent report on household finances from the Bank of Spain. Amortizations represented 1% of the initial mortgage balance in January 2022, when the ECB acted against inflation. That percentage was already above the pre-pandemic average (0.8% from 2015 to 2018) and rose to 1.3% between January and March last year. Since then, it gradually slowed to return to the initial 1% in October and November. A senior bank executive notes that early amortization is down, but still higher than before rate hikes. It would be misleading to compare it only with other high-rate moments; six years of near-zero rates prior to 2022 had little economic sense for prepaying.
The data do not suggest that households are running out of savings or reducing mortgage amortization pace due to cash shortages. According to the INE, gross disposable income grew 10.6% in the third quarter of the previous year, outpacing consumption at 4.5%. Savings generated reached 7,027 million, placing savings at 9.1% of disposable income on seasonally adjusted terms, more than double the level from a year before. Financial wealth, defined as the difference between assets and debts, rose by 8.6% in a year. At the end of June, Spain’s households reported 2.79 trillion euros in financial assets and 746.689 billion in liabilities, with a positive net position of 2.05 trillion. Most savings were in cash and deposits (1.046 trillion) and holdings in companies and investment funds (1.29 trillion).
The trend toward faster amortizations is not universal across the euro area. Mortgage payments in the euro area dropped from 1% of the balance in January 2022 to 0.7% last November, remaining below the 2015-2019 average (0.9%) since September 2022. The divergence stems from Spain, where about 65% of mortgages are variable rate, so payments rise with reference rate increases. In Europe generally, fixed-rate mortgages are more common, keeping payments steady and allowing households to use savings to address inflationary pressures through other means instead of accelerating amortizations.