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Where are European mortgage holders most exposed to higher rates?

Mortgage broker Nicholas Mendes can describe how his customers have felt over the past year in a single word: shocked.

“People coming off their fixed rate from less than 2 per cent have that reaction of ‘Wow, that’s my new monthly repayment?’,” said Mendes who works at London-based company John Charcol.

Across Europe, borrowers looking to secure new mortgages or refinance existing ones have found their payments soaring on the back of sharp rises in central banks’ interest rates.

With inflation set to fall back to rate-setters’ 2 per cent targets slowly and borrowing costs likely to remain higher for longer than initially anticipated by lenders and borrowers alike, an increasing number of people will be hit financially in the coming years.

For those already on the housing ladder, there are vast differences in levels of protection against higher rates. Much depends not only on variations in rate-setters’ levels of aggressiveness but also on divergences within national mortgage markets.

Even within the single currency area, borrower preferences and the products lenders offer diverge dramatically.

“Historical traditions mean there are still radical differences between mortgage markets throughout Europe,” said John Muellbauer, an economist at the University of Oxford. “Despite the launch of the single currency more than two decades ago and some integration in other areas of financial markets, that hasn’t happened in housing.”

Those traditions mean the mortgage markets in Europe’s six largest economies are difficult to compare. But using several data sources and interviews with brokers across the region, the Financial Times has analysed which country is most exposed to higher rates.

United Kingdom

UK homeowners are among the most exposed due to a combination of higher rates — the Bank of England’s benchmark rate is 5.25 per cent compared with the European Central Bank’s 4 per cent — and the proliferation of short-term fixed-rate deals.

More than 1.4mn British households will be affected by much higher mortgage costs this year alone, according to data from the Office for National Statistics, as they roll off fixed-rate deals that were set when policy rates were a fraction of today’s levels.

Even so, without the changes in the mortgage market over the past two decades, the UK would have been much more vulnerable.

Since 2003, the proportion of mortgages on a variable rate, which moves directly in line with central bank rates, has dropped from 70 per cent to 13 per cent, with 61 per cent of loans now on five-year or longer fixed rates, compared with 11 per cent 20 years ago, according to Oxford Economics.

France

Borrowers in countries such as France have so far had greater protection from higher rates, mostly because their mortgages tend to be fixed for decades at a time.

While fixes of more than five years are rare in the UK, the average length of a mortgage in France is 23 years, according to the Bank of France. Less than 5 per cent of French mortgages track policy rates.

Another reason French borrowers have not been as badly hit is due to the so-called usury rate, a maximum level of interest banks are able to charge, set by the Bank of France to protect consumers and guard against over-indebtedness. It tracks inflation and has now started to rise, but not at the same pace as interest rates in Europe. That has caused short-term pain for lenders, until the rates they charge can catch up.

“French banks have not enjoyed the same boost to revenues and immediate benefit from higher rates as their European peers,” S&P Global Ratings said in a report last month.

The flip side of these measures to protect consumers has been a drop-off in new home loans, as banks shy away from lossmaking deals. Bank of France data showed the amount of new loans granted dropped to €12bn in July — the lowest level since 2014.

Spain

By contrast, variable rate products account for roughly 75 per cent of the 5.5mn outstanding mortgages in Spain. “The 4.1mn families who have variable mortgages are freaking out,” said Ricard Garriga, chief executive of Trioteca, a Barcelona-based mortgage broker.

Rising central bank rates mean customers are desperate to switch products. Facilitating those changes is a 2019 mortgage law that made it easier for consumers to move to a different lender by ensuring that cancellation penalties and fees were not prohibitive.

Taking a typical €200,000 loan, Garriga said, the most common exit penalty was 0.5 per cent of its value — €1,000 — and that borrowers would also have to pay a new appraisal fee of €300-€400.

The nature of the products on offer is also changing. While 10-year-plus fixed mortgages surged in popularity when borrowing costs were low, Spain has shifted into a new era in the past year. The fastest-growing category is now “mixed” products. Familiar to UK homeowners, they offer a fixed rate for a few years before becoming variable.

Such products accounted for 37 per cent of all new mortgages in July, according to data from CaixaBank.

Germany

German borrowers have long preferred longer-maturity mortgages, with 10 to 20-year fixed rate products the most popular.

However, unlike in countries such as the UK or France, where limits are placed on how much customers can borrow based on the value of their income, German borrowers have fewer constraints.

The lack of strict limits based on income helped fuel strong rises in house prices during the boom years of low interest rates and massive bond purchases under the ECB’s quantitative easing programme. Over the past year, property prices here have fallen 10 per cent — the sharpest drop in the entire EU.

Higher rates and lower prices could be making mortgages less risky as Germans are now paying larger deposits — even if it means asking parents for help. “Buying a property is now more often a real family project,” said Frank Lösche, a construction financing specialist at Dr Klein, a German mortgage broker. 

Jens Tolckmitt, chief executive of the Association of German Pfandbrief Banks (VDP), which collects data from 700 credit institutions, agrees that the rise in financing costs has made high loan-to-value loans rarer. He estimated debt as a share of German house purchases has fallen from 80 per cent in 2021 to 75 per cent this year.

There had also been a shift away from loans with a fixed-rate period of well above 10 years, said Tolckmitt. These had fallen from half of new business to just below 40 per cent, despite a “long-lasting tradition” of long-term lending in the German mortgage market, he added.

Italy

For Italians, the pre-euro era of high interest rates left a lasting impression. Many prefer to purchase homes in cash, removing the risk of rising borrowing costs altogether.

Before the pandemic, 51 per cent of first-time homebuyers and 81 per cent of buy-to-let investors did not take out a mortgage, according to real estate group Tecnocasa.

Italian homeowners with a mortgage have traditionally had to make relatively high repayments due to banks’ stringent lending conditions.

According to Muellbauer, this has meant that overall levels of Italian mortgage debt are “unbelievably low” relative to income levels.

The result is that, despite many of those with mortgages relying on variable rates, Italian homeowners are relatively well insulated overall.

However, some of those with loans — many of which have variable rates — are struggling with higher mortgage costs.

In March — the most recent month for which data is available — mortgage instalments worth a total of €6.8bn were missed, according to Fabi, the national bankers association, with those tied to variable rates proving “especially problematic”.

Netherlands

In the Netherlands, variable rate and short-term mortgages have become much more popular as customers try to avoid locking into soaring rates that are likely to drop in the medium term.

Such products made up more than 21 per cent of new or refinanced deals in June, up from less than 11 per cent a year earlier.

Dutch homeowners must also contend with the frothiness of the property market. OECD figures show prices in the Netherlands have surged by almost 50 per cent since 2015 — when the ECB kicked off its multitrillion euro QE programme — and this year.

But they will have dropped 9 per cent from their July 2022 peak by the end of this year, according to analysts at Rabobank, raising the prospect of negative equity for more recent buyers in the Netherlands.

Jasper de Groot, chief executive of property website Pararius.com, said about one in 25 owners had outstanding loans that were worth more than the value of their homes. However, the housing shortage in the Netherlands would limit further price falls, he added. “As long as interest rates stabilise, I do not expect further declines.”

Reporting by Owen Walker and Akila Quinio in London, Sarah White in Paris, Barney Jopson in Madrid, Martin Arnold in Frankfurt, Silvia Sciorilli Borrelli in Milan and Andy Bounds in Brussels

Data visualisation by Ella Hollowood and Carolina Vargas

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