Fixed interest rates on mortgages have risen, significantly reducing the ability of borrowers to avoid the constant burden of higher interest rates. Even those who decide to switch from floating to fixed interest rates are in for “surprises”: increased conversion fees, which reach even 250-300 euros, as well as a change in the interest rate of the loan after a fixed period. There is also on the table the imposition of penalty fees for those who want to make early repayments – mostly partial – to “maintain” the level of the monthly payment.

Three rate hikes by the European Central Bank have already put a strain on mortgage-paying households, and tough times lie ahead. By the end of the first quarter of the new year, at least one or two more rate hikes by the ECB are looming. And because the increase works cumulatively, the bulk of the burden will fall in 2023. For a loan of 100,000 euros with a maturity of 15 years, a three percentage point increase in the interest rate (for example, from 1.5%, which was in June 2022 to 4.5% at the beginning of 2023) will increase the installment plan from 626 euros today to 772 euros. This is a monthly fee of 145 euros and an annual loss to the family budget of 1740 euros. When the average salary in Greece is estimated at around 1,100 euros, we are actually talking about a loss of more than 1.5 salaries.

Many borrowers have fled and are rushing to the banks in search of the safety of a fixed interest rate. However, in the interest rate conversion process, they face the following problems:

1. Immediate “adjustment” of fixed interest rates to the new data formed after the decision of the ECB. In the summer, the 5-year fixed rate was below 3%, and now the 5-year fixed rate has exceeded 3.5%-3.6%. Accordingly, the 10-year fixed bond is now moving above 4% and about 1 pip higher than it was a few months ago.

2. In addition to the fixed rate increase, the borrower must also consider high conversion fees. €300 per contract could make it unprofitable to convert to a loan that is close to maturity. For example, a €10,000 debt due in three years would result in an increase of €13 per month due to a three point floating rate increase. Thus, in practice, the benefit of switching to a flat rate does not even cover the commission.

3. The most important question that the borrower must answer is what happens after the flat rate expires. The borrower has a loan that today bears interest at the ECB interest rate increased by 1 percentage point (i.e. such loans were issued mainly in the period 2005-2007). The borrower converts the interest rate into a three-year fixed rate. After three years, the borrower will not return to the ECB+1%. The float can be asked to be tied to the three-month Euribor and even increased by three percentage points. Thus, the borrower assumes a large risk associated with an increase in the spread over a long period of time.

Two Solutions for Smaller Doses

As banks and the Treasury are already in talks to find ways to ease the strain on households from rising interest rates, borrowers may be taking action in the meantime to delay loan repayments. With a note requiring special attention: the borrowers who have joined the Bridge programs have committed themselves for a certain period of time (up to 18 months from the end of the subsidy period) to make regular installments and not to carry out agreements. Those who do not fall within this period – a violation of this condition may cause a claim for the return of the subsidy – have the opportunity to extend the loan repayment period in order to maintain the amount of the monthly payment.

For a loan of 100,000 euros with a remaining maturity of 8 years, the installment in the summer was 667 euros, and in the spring of 2023 it is likely that it will reach 748 euros. With an increase in the repayment term from 8 to 10 years, the monthly installment remains (despite the increase in interest rates) at 625 euros, which is about 41 euros lower than in the summer of 2022. Thus, an increase in the repayment period of about 20% – 25% is enough to keep the dose. In a €100,000 loan with a 15-year front, a €626 installment in the summer will become €771 in the spring, and the repayment period will have to be extended to 20 years to cap the installment again to €640.

The second solution is only suitable for those who have liquidity. The borrower in the previous example, who owes €100,000 and risks a €771 installment, can set aside €18,000 and keep the installment at summer levels. Well, early repayment of about 18% of the remaining debt is required, as well as ensuring that there are no prepayment penalties.
Making it easier for borrowers to enter into such arrangements is likely to be part of a “package” of measures that need to be promoted to mitigate the risk of a new generation of bad loans.