Spain has moved to reduce the painful impact of higher borrowing costs on the country’s most vulnerable mortgage holders by approving a package of relief measures.
After weeks of talks between the government and banks, Spain’s cabinet on Tuesday authorised measures that it said would help more than 1mn households, including a cut in interest rates for a five-year grace period.
The moves make Spain one of the first eurozone countries to cushion the blow of rising mortgage costs driven by aggressive rate increases in the battle to tame record-high inflation in the region of 10.6 per cent. The European Central Bank has raised rates by 2 percentage points so far this year.
Nadia Calviño, Spain’s deputy prime minister and economy minister, said: “Now is the time to pull together and help families who may be affected.”
Spain is especially vulnerable to the ECB’s rate rises because about three-quarters of its mortgage holders have variable rate loan contracts linked to its monetary policy, although they are generally adjusted only once a year.
The most vulnerable families, defined as those with annual income of less than €25,200, will be able to reduce their interest rates to Euribor minus 0.1 percentage points under the proposed measures. Many mortgage holders are paying 1 percentage point higher than Euribor, an interbank rate that anticipates ECB moves.
The economy ministry said that a family with a mortgage of €120,000 and a monthly repayment of €524 tied to recent ECB increases would have it cut in half to €246.
Borrowers will also be able to extend the life of their loans by up to seven years under the planned changes, which involve reforms to an existing code of good practice for the mortgage market.
But ADICAE, a consumer group, noted that extending the duration of mortgages would result in borrowers paying more interest in total — even though their monthly payments came down.
The 12-month Euribor rate as of November 18 stood at 2.84 per cent, while the ECB’s main deposit rate is 1.5 per cent. The ECB is expected to increase borrowing costs again in mid-December.
The economy ministry noted that the “final details are still to be finalised” in its talks with banks and their trade associations.
Yolanda Díaz, one of Spain’s other deputy prime ministers and a radical junior partner in the Socialist-led coalition government, said there was “substantial room for improvement” in the proposal.
Onur Genç, chief executive of BBVA, one of Spain’s biggest banks, said: “We are still working on it.” José Antonio Alvarez, chief executive of Santander, said the outstanding issues were mostly “technical” but could have an impact on banks’ loan loss provisions and use of capital.
One government official described the measures as “preventive”, stressing that the authorities were not confronting any crisis as loan default rates remained low by historical standards.
Families in a higher income bracket, with earnings up to €29,400 a year, will be able to freeze the size of their monthly repayments while benefiting from the seven-year loan extension.
In addition, Spain will eliminate fees for the early redemption of loans and for converting floating-rate mortgages to fixed-rate products.
The Bank of Spain previously said 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.
The measures are voluntary, but government ministers have been firm in saying that they expect lenders to follow them.