European mortgage rates may still rise again

Euribor rates are reflecting the market expectation of a further rate rise of 0.25% in around 1 month, which means European banks may well have to raise variable mortgage interest rates again soon, according to French, Italian and Spanish mortgage specialist Offshoreonline.org.

European mortgage banks use the Euribor reference rate as their reference point for pricing variable rate home loans for both domestic and overseas buyers. Typically, the lending bank will add a margin of anything from 1% to over 2% to the quoted Euribor rate, depending on the type of product, size of deposit and assets of the borrower. Different banks use different Euribor rates as their base for pricing loans, with the most common being 1, 3 and 12 months.

Three month Euribor has now risen from 3.7% in January of this year to nearly 4.7% this month. Tim Harvey, managing director of Offshoreonline.org comments, “The picture of rising central bank interest rates in Europe reflects the situation in the UK to an extent where we have seen UK Base Rate rise several times this year, although the recent stock market volatility may well now affect what has been a gentle uptrend in Europe for all of this year. UK homeowners in France, Italy and Spain are now far more likely to feel the effects of global interest rate tightening, as they tend to prefer variable rate loans, whilst domestic buyers are more attached to longer term fixed rates which will not have moved.”

However, the picture is not universally gloomy. Unlike UK lenders who tend to move mortgage rates as soon as UK Base Rate is changed, some European lenders take a more flexible view, with many waiting for some time after a change in central bank rates before announcing interest rate changes. Interest rates of 3.90% fixed for the first year are still available in France, a rate which is only marginally higher than the 3.75% being offered in January. Tim Harvey continues, “The European and in particular French mortgage system is very different from the UK, so buyers will do well to understand the huge range of offers available. New buyers now can still lock into fixed rates as low as 3.90% for 12 months, a figure which has hardly moved this year. Unlike UK banks, French lenders do not necessarily rush to withdraw fixed rate offers as soon as Euribor is changed.”

Another feature of lending in Europe which will come as a surprise to UK buyers is the transparency of mortgage pricing. Fixed rate loans do exactly what they say on the label, for example, there are no lock in periods or punitive interest rates at the end of the fixed rate term. For those borrowers who opt to cash in a fixed rate loan before the end of its life, there is usually just a simple 3% penalty payment. Amongst variable rate loans, remortgage and equity release products often carry a 3% penalty up to the first 5 years, but thereafter, early repayment can be penalty free. Tim Harvey ends, “European mortgages can appear to be far more customer friendly than their equivalent UK product. Variable rate loans usually have a stated margin over Euribor for the life of the loan and so are in effect “lifetime trackers,” so borrowers know exactly where they are at all times and lenders cannot use interest rate changes to modify pricing to the disadvantage of the borrower.”

The complexities of currency, language, customs and local law all add up to make negotiating a foreign currency mortgage a far more complex task than the equivalent UK product. Add to this the relaxed continental attitude, which is one of the main reasons so many people move across the Channel, and you can see why house hunters should allow plenty of time to get their finances in order before viewing their dream home. For information on mortgages in France, Spain , Italy and equity release in the UK, visit offshoreonline.org.