The US attack on Iran and the subsequent closure of the Strait of Hormuz are already having a tangible effect not only on global financial markets, but also on the pockets of households. Discounting higher inflation expectations, the average 30-year mortgage rate in the US has once again crossed the psychological threshold of 7 per cent, a level that historically tends to dampen the housing market.
The movement is not only affecting America. In Europe, too, the strain on bonds is being transmitted directly to the cost of mortgages through the rise of the Eurirs, the parameters used to determine fixed rates, and the Euribor, which reflects the ECB’s expectations of short-term rates. Both these parameters are rearing their heads.
The rise of the Eurirs and Euribor
More in detail, the 3-month Euribor rose from 2.01% at the end of February to 2.18%, while the 20-year IRS rose from 3% to 3.34%. This means that those who are paying a variable-rate mortgage will find themselves with a 15-20 euro higher instalment from next month (for a 150,000 euro 30-year mortgage), in a trend that could continue if the ECB really does align with the market movement. In fact, the bond markets are already doing the central bank’s dirty work, tightening financial conditions well before any official ECB moves, and are discounting between two and three rate hikes in the Eurozone in the coming quarters to cope with the inflation rebound triggered by the Middle East conflict.
The Euribor forward curves currently indicate a further rise of 0.50-0.60 % in the coming months, with the three-month rate expected to be between 2.7 % and 2.8 % by the end of the year. A scenario that is likely to weigh especially heavily on variable-rate borrowers already exposed to rising rates.The picture is different for those who have to take out a new mortgage today. “At the moment Italian banks have chosen not to immediately pass on the high rates to new customers, instead launching important promotional campaigns to support demand,” notes Rossini, CEO of MutuiSupermarket.it.
The action on spreads
In fact, the best offers on new variable-rate mortgages only went from 2.47% to 2.49%, while on fixed-rate mortgages there was even a slight improvement in offers, from 3.33% to 3.17%. Many lenders at this stage decided to reduce the spread, i.e. the gross margin applied on the loan, which is one of the two components of the final rate of a mortgage, thus avoiding a rapid increase in costs. If they had not done so, new fixed-rate mortgages of EUR 150,000 would already see instalments on average about EUR 30 more expensive.