Homeowners across the euro area will feel the pain of rising mortgage costs until the end of the decade despite declining interest rates, the European Central Bank has warned.
Many borrowers who took out home loans during the era of low and negative interest rates face remortgaging over the next few years, ECB staff said in a blog post on Wednesday, cautioning that belt-tightening by those households would result in a “drag on consumption” that could last “at least until 2030”.
After inflation started to surge from late 2021, the ECB rushed to end the era of negative interest rates in 2022, lifting borrowing costs from -0.5 per cent to 4 per cent within just 15 months.
While rate setters in Frankfurt have been dialling down steep borrowing costs since June 2024, the average mortgage rate will continue to rise for years, the ECB analysis says.
Rate setters have lowered the ECB’s key deposit facility rate seven times since last June, bringing it down from 4 per cent to 2.25 per cent at their previous meeting in April. Investors and analysts expect that two, if not three, more quarter-point cuts will follow this year.
But certain features of the European mortgage market mean any benefit from rate reductions for the bulk of homeowners will be delayed. Three-quarters of private property buyers in the euro area lock in borrowing costs at the time of their purchase for several years.
In France, for instance, more than 40 per cent of mortgage rates are fixed for more than a decade, with the bulk of the remainder being fixed for three to 10 years, the ECB data shows. In Germany, fixed-term mortgages are also common while Spain and Italy have a higher share of floating-rate mortgages.
“Many [fixed-rate mortgages] that were issued in the period of low interest rates are still set to reprice at higher rates in the coming years,” the ECB said in the analysis.
Moreover, “borrowers who gradually repay their lower-rate loans are [being] replaced by new mortgagors taking up new loans at higher rates”, the central bank said.
The ECB’s consumer expectations survey suggests that almost half of homeowners in the euro area have cut their spending or their savings over the past 12 months “either in response to, or in anticipation of, higher interest rate payments”.
Nearly half plan to continue cutting down on consumption over the next year, the survey suggests.