Last week saw continuing press reporting on the pressures the Banks in Spain are under on cost of funds.
The key issue in layman terms is that the cost of borrowing for the banks of the money they then lend on and the cost of borrowings to support existing loans on the books is at an all time high. No longer can Banks rely on paying their savers less interest than they lend money out at as saving deposits no longer supply all the funding needs they have.
On top of savers not supplying all the funds lent in an effort to shore up liquidity and asset values the Banks are in any case currently often having to offer depositors higher rates than they can lend the money back out at.
The impact on borrowers is higher margins above Euribor, as the Banks attempt to shore up profitability, and the adding of profit earning and often unnecessary related products like life insurance to the loan.
All Banks in the last 12 months have increased the margins they charge on new loans, this is across the board but for non residents the rises have been on a percentage basis more than those for the resident market where banks need to hold competiveness to attract new customers from the Spanish population.
The area where banks are still offering lower margins is where clients considering buying bank owned stock. Rates as low as 0.50% above Euribor can be gained and loans up to 100%. Whilst on the face of it this may seem very attractive the terms on the loan are often the quid pro quo on price you pay for the property. agreement and
Because the terms of a Spanish mortgage are held in a deed not a credit agreement they cannot be changed easily or without costs. The ability to move the loan in more preferential market or gain a lower tracker rate with existing lender in years to come when costing pressures have abated is at present a non starter.
If cost of funds drop in the future the Banks in Spain will become very profitable again as the costs of re-financing their existing books will drop whilst the rate being paid by these existing borrowers will remain high. Banks will know clients are tied into high margins above Euribor without the ability to easily move.
Two future possibilities could help this.
- One would be for the government to completely overhaul the remortgage market and remove the requirements currently linked to moving a loan and reduce costs of doing so becoming a free market as seen in the UK. Removal of mortgage deed tax and no requirement for a notary being the biggest required changes.
- The second will be when Banks have an appetite to lend again for lenders to make a commercial decision to assist with costs of move to attract customers from a competitor to themselves.
All of this is a long way off so for the foreseeable future whilst Euribor rates may stabilize and possibly even drop the margin being paid above this will remain high.
International Mortgage Solutions