The pace of rising interest rates is increasing due to Eurozone inflation hitting a new record of 5% in December according to the release of the latest data. Rising interest rates mean higher monthly payments for homeowners with a mortgage. As rates are still relatively low it could make sense to refinance your current mortgage. There can be various reasons to refi:

- Lower interest rates mean lower monthly repayments

- Capitalising on the current low rates by choosing a long dated fixed mortgage period which offers financial certainty, stability and peace of mind

- Choosing a different type of mortgage and/or extending/shortening the repayment period

Who would not want that, a lower interest rate and to pay less? The longer ago the mortgage was taken out, the greater the difference between the interest you pay and the interest you could get. In addition, the spread (the margin the banks charge which is part of the interest you pay) is likely to be lower now than in the past. In the past spreads have been above 2% whereas current spreads are between 0.9% (low LTV) to 1.25% / 1.65% (medium/high LTV). It is well worth considering as a mortgage covers a long period of time thus the potential cost savings can be tremendous. However, refinancing your mortgage is not for free. There could be a penalty of 0.5 to 2% of the outstanding value of the loan depending if you have a floating rate or a fixed rate mortgage. Additionally, there may also be one-time off costs, for example notary or property evaluation (in case you change provider). When you refi, keep in mind the difference in penalty costs of future early repayment. If your personal circumstances change, e.g. you are thinking of moving in the near future or, less pleasant, your relationship could end up in a divorce, then it may not be a good idea to commit to a fixed rate mortgage. Also, it may well be possible that you are comfortable with your current monthly repayment and that you do not need to worry about your financial situation. If this is the case, you can refi and shorten the length of your mortgage. In this way your monthly payment stays the same, but the repayment of capital is higher while the interest component decreases. As interest rates are rising you can see the hand of the ECB in the short rates of 6 to 12 months, as they have hardly changed. This is artificial and without the ECB these rates would be higher. Currently 6 and 12 month Euribor and 5 to 10 year swap rates are respectively -0.52 /-0.47 / 0.12 / 0.40 versus respectively -0.50 / -0.48 / -0.25 / 0.13 8 months ago. From the lows a year and a half ago, the interest on a 10 year fixed mortgage has risen by 1%. It is always difficult to time the market, but those who refinanced a year ago are now looking smart.

Many homeowners have a floating rate mortgage which at the moment carries a negative interest rate of approx. -0.52% due to central bank intervention, which worked well for several years. But this will not last forever. When it ends rates could move back up to 0.5 - 1%. On an annual basis this increases the cost of a Euro 150.000 mortgage by Euro 1470 to 2220, or Euro 122.50 to 185 per month. We do not know what the future holds, but if inflation stays high for the coming years, short term rates may move up further as the ECB will try to rein in inflation. Under this scenario 2 to 2.5 is not an unrealistic level as it has been there (and above) in the past and would be a serious dent to disposable income.

The conversion of interest rate on government bonds from countries in the Eurozone is likely to reverse as the markets begin to anticipate the unwinding of the ultra-loose monetary policy by the ECB (which compressed bond yields) and the focus shifts to financial budgets and variations in debt to GDP levels of the individual countries. This means that bond yields of

Southern European countries will go up, but as floating rate mortgages are based on 6 and 12 months Euribor and fixed rate mortgages are based on European interest rate swaps of 5, 10, 15 and 20 years they will be less affected. This is one of the benefits of having a common currency, as in Portugals case going back to the Escudo would mean much higher interest rates and who needs that?

Whether you are considering buying a property with or without a mortgage or do not know if you want to sell, refi or rent your property contact us to find out more about your possibilities and it is free of charge. We are confident that whatever you decide afterwards, it will be a more well-informed decision.

Robert Bijker
Director

* Written on the 23rd of January 2022, first published in the East Algarve Magazine 1st of February 2022