Who is going to buy property hears from many quarters that this is the best time to move. Property prices have fallen and interest on mortgages travel at historic lows, while the ECB - in addition to having almost eliminated the cost of money - has started Quantitative easing, which will increase the liquidity available to banks, and therefore (in theory) their ability to lend. But what does all this mean for those who want to take out a mortgage? And, above all, is it better to choose a fixed rate or a variable rate today?
WHAT DOES THE MARKET OFFER TODAY?
To understand better, let's start with the numbers. "At the moment, fixed rates range from 2,96% to 3,40%, but most focus between 3% and 3,20% – Roberto Anedda of MutuiOnline.it, the first Italian online broker in the sector, told FIRSTonline -. With regard to the variable, the spread is taken into consideration almost exclusively, because the Euribor is almost at zero: let's go then 1,54% to 2,01%”. The Euribor index expresses the average of the rates at which the main banks declare that they lend money to each other (a sort of base rate), while the term "spread" means, in this case, the fixed cost required by the banks to grant the loan. The sum of these two components produces the floating rate.
HOW WILL RATES CHANGE IN THE FUTURE?
Reading only the percentage values, it seems obvious to choose the variable, as indeed did 77% of those who took out a mortgage in Italy in 2014. Of course, compared to the stability of the fixed, the variable always involves a margin of risk, above all considering that one of the central objectives of Qe is the fight against deflation and the raising of inflation to around 2%. “But in the next two years rates should remain stable at a very low level – continued Anedda -. To date, it is expected a maximum increase of one point five years from now. As for the suns bank spreadshowever, there is room for a further reduction. Also this month the banks have operated reductions, in some cases falling to 1,50%. We expect it to be in the area between 1,40 and 1,50% by the end of the year. Only then will it be difficult to imagine new cuts”.
The opinion of Luca Dondi, general manager of the research and consultancy company Nomisma, is different, who deems it likely "the prospect of a rate increase of the order of one percentage point, or something less”, already in the next “two-three years”. According to Dondi, "rates will remain low in 2015, but it is inevitable that there may be upward movements over a longer time horizon", even if "they will come gradually".
EYE TO REAL RATES, WAITING FOR INFLATION
So far we have talked about nominal rates, those written on contracts. However, the most important value for those who take out a mortgage is another: the real rate, which is obtained by eliminating the nominal price dynamics. In essence, inflation is good for debtors because it erodes a portion of the cost of debt every year. However, we are now in deflation (-0,6% pa in January, the worst result since 1959, followed by a -0,1% in February) and the mechanism works in reverse, damaging those who have to return the money. According to Anedda, “with inflation equal to zero, 3% corresponds to a real 5%. But the minimum of fixed rates had been 4% real in 2010, and beyond that window rates had always been higher”. However, if in the next few years the ECB really succeeds in kick-starting inflation, then anyone who has taken out a mortgage at a fixed rate of 3% today would truly obtain savings on interest of historic proportions.
HOW TO CHOOSE BETWEEN FIXED AND VARIABLE RATE
Better the fixed rate, then? Depends. The only certainty is that there are no certainties: it is impossible to choose a mortgage and be 100% sure that you have taken the most convenient route. Nevertheless, some small strategy is possible.
“With rates at these levels, and considering that the ECB has ensured that they will remain low for a long time to come – Francesco Avallone, vice president of Federconsumatori told FIRSTonline -, it is preferable to choose a variable rate. Meanwhile, you start saving in the early years. After that, you can do the renegotiation, perhaps switching to fixed, depending on market conditions”.
Dondi, on the other hand, underlines that "the fixed rate has never been so convenient", but "since there are no particular rate increases in the medium term, not even the choice of a variable rate would be risky". In any case, also according to the Nomisma CEO, “it must be borne in mind that, unlike in the past, the transition from fixed to variable is no longer impossible. In the light of the change in interest rates, the conditions of the loan can be reviewed thanks to the renegotiation with your bank substitute (which we talked about , promising, ed) or to the replacement (which differs from the subrogation because it also implies the request for a higher amount than what would remain to be paid, ed)”.
These positions take into account the"French" depreciation practiced by most Italian banks. Basically, the amount of the installment remains constant, but its composition changes: the interest rate is maximum at the beginning and gradually decreases, while the principal rate increases in parallel. For this reason, the advantage of a low interest rate carries much greater weight at the start of the mortgage. “Those who choose a fixed rate have the certainty of knowing how much they will pay for the entire term – added Avallone -, but they are also sure of paying much more in the first few years”.
According to Anedda, however, “predict future renegotiations it's always complicated, because you're never sure what the rate levels will be. This is especially true if we are talking about fixed assets, which look to the long term, therefore they will probably rise before the variable ones. It is possible that as early as next year the best fixed rates will be higher than we have now”.
In short, to choose it is always necessary to evaluate the type of mortgage you want to take out and the weight this has on your income.
The landline
The fixed rate, says Anedda, is advisable “to those who in any case need to keep their financial expenditure under strict control. The difference with respect to the variable is so small (about one and a half points) that one can think of accepting this increase as an insurance against possible future risks. You pay more to have the security of a constant and in any case low installment”.
The variable
Anedda, on the other hand, recommends the variable option in cases in which "the mortgage has a limited weight on the family budget (due to the characteristics of the loan or to income) and therefore, even if rates should rise tomorrow, the situation could still be managed with a certain calm".
The third way: the “prudent” variable
Finally, there is an intermediate strategy, namely “choosing the variable, but from the earliest years set aside the difference which exists with respect to the installment with a fixed rate – explains Anedda again –, creating a reserve to draw on in the event of a sudden increase in interest rates. In this way, the advantage guaranteed by the variable is monetized, but at the same time we protect ourselves from risks". And if this safety net turns out to be useless, there would be a fair amount left to spend or invest elsewhere.
