Analysis and Changes in Interest Rates

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Predicting the development of market indices is a very difficult challenge for all analysts.

The TassoMutuo Analyst Team focused on the study of the two most important reference indices for mortgages, the Eurirs and the Euribor, trying to understand over the last 20 years what would be the best choice between a fixed-rate mortgage and a variable-rate mortgage.

Before proceeding with the study, it is important to define what Eurirs and Euribor are.

The first index is used for fixed-rate mortgages, i.e. those contracts that have a predetermined interest rate at the time of stipulation and is frozen until the end of the contract, while the second index defines the interest rate of variable-rate mortgages and is linked to financial market trends. In this case, the interest rate of our loan varies as the Euribor changes.

Our study used the period 2003/2023 to make a general analysis and then focused on a 20-year mortgage.

The advantages and disadvantages are easy to identify. In a fixed-rate mortgage, it is possible to shelter oneself from possible interest rate rallies, such as the one that has characterised Italy from July 2022 until now; at the same time, where rates are at very low values, as in the Covid period, the interest rate is effectively crystallised.

On the other hand, in the case of variable-rate mortgages, the continuous rise in interest rates produces a gradually higher repayment instalment than at the beginning, and in times of a sharp fall, such as in the post-2008 period, it generates the saving of a significant portion of interest and consequently allows for a reduced monthly instalment.

If we had had a variable-rate mortgage contract at its peak in 2008 over the next 13 years we would have enjoyed one of the greatest downward trends ever, touching a low of 0.547 in December 2021, having fallen by almost 4%. Since December 2021, rates have seen an initially steady rise before culminating in sharp rises touching their peak on 20 October 2023 with the last ECB rise, and this was reflected in a +54.58% for variable-rate mortgages.

With reference to our study, if we had taken out a 20-year mortgage for a value of €150,000.00 in October 2003 we would have had an initial instalment of €894.02 (considering a spread of 1.6%) reaching a maximum instalment in 2008 of €1162.95 and a minimum instalment of €696.55 in December 2021. If we made a more detailed analysis with respect to the initial instalment, we would have saved an average of about €16,400.00 during the periods of decline, but taking the highest instalment as a reference, we would have had a higher expenditure of €5216.56; in short, we would have had a positive result on the repayment of about €11,000.00 in interest. If in October 2003 we had chosen the 20-year fixed rate, the Eurirs index would have been 6.20%, considering the average spread.

Taking the same case again, this would have resulted in a monthly instalment of € 1,092.32. In the scholastic hypothesis of subrogating this mortgage at a rate of 2.21%, this would only have been possible in May 2012, about ten years after the mortgage contracted, touching its lowest point from 2015 onwards, stabilising at around 1%. So our fixed interest rate would have been ‘inefficient’ for about 10 years and almost breakeven for the next 7 years and positive in the last 3 years of the mortgage, subrogating the mortgage in 2020. Summing up, although not by much the variable rate mortgage would have been a more optimising choice in terms of the amount repaid.

However, as mentioned at the outset, it is almost impossible to predict the trend of the reference markets, so the choice of a fixed rate for mortgages appears to be the most considered choice. Where, on the other hand, one wants to try to take advantage of market fluctuations, opting for a variable rate, it is advisable, at times of interest rate downturns, to set aside the theoretical excess part of the mortgage instalment to a guarantee fund so that, should there be substantial increases, the mortgage instalment would still be sustainable for the family.

EDITED BY EUROANSA SPA

Via del Tempio 8, Livorno Tel: 347 8474322 marta.barlettani@euroansa.it www.euroansa.it