Even after the European Central Bank (ECB) starts to lower interest rates, euro zone households will “continue to pay the price” for soaring mortgage payments over the next five years, according to a new ECB study published on Wednesday.
According to Reuters, in a bid to support the struggling eurozone economy, earlier this month the ECB cut borrowing costs for an eighth time in 12 months, reducing its key rate to 2%.
However, this step would not immediately alleviate the strain on household budgets. The central bank’s decision to raise interest rates from -0.5% to 4.0% in less than a year to combat rising inflation has resulted in a prolonged period of high borrowing prices.
Loan resets to increase monthly payments
According to the ECB assessment, a growing number of eurozone mortgage holders will face higher monthly payments in the coming years.
This is partly due to the nature of many existing mortgages, which have fixed rates for a limited period before switching to variable rates based on current market conditions.
As those loans reset at current, higher interest rates, household budgets will be put under increased strain.
According to the analysis, around 10% of mortgage borrowers in the eurozone will have their rates reset within the next three years, and approximately 20% by 2030.
Because one in every four households in the eurozone has a home loan, the consequences are projected to spread far throughout the region’s economy.
Long-term impact on consumer spending
Higher mortgage payments are projected to have a considerable impact on consumer spending, a crucial engine of the eurozone’s economic development.
The ECB expects that the cumulative effect of its recent rate hikes will lower consumption growth by 1 percentage point between 2022 and 2030. Notably, over one-third of the negative impact is still to come.
This prolonged pressure on consumption indicates an important problem for policymakers. While the ECB has begun to ease monetary policy to support growth, previous choices continue to have a restrictive impact on household finances due to their delayed transmission.
Disproportionate effects on lower-income households
The report also highlights a difference in how the load is divided. Lower-income households, particularly those with existing floating-rate mortgages, are predicted to be most affected.
And adjustable-rate mortgages, which reflect interest rate changes more immediately, subject borrowers to payment shocks when rates increase.
This risk is especially acute in Spain and, to a lesser degree, in Italy, where several mortgages have variable interest rates.
By contrast, France and Germany have a higher proportion of long-term fixed-rate mortgages, helping to shield borrowers from changes in interest rates.
Changes in mortgage structure after the financial crisis
Since the global financial crisis of 2008-2009, the prevalence of fixed-rate mortgages in the eurozone has increased. Many households that suffered with escalating payments during that time desired greater stability in their borrowing conditions.
While this move has reduced the immediate impact of recent ECB rate hikes, it has also spread the repercussions over a longer period, making the ramifications more long-lasting.
Despite the ECB’s continuous efforts to strengthen the eurozone economy by loosening monetary policy, the delayed effects of earlier rate hikes will continue to reduce consumer consumption through higher mortgage payments.
With many borrowers facing rate resets and a significant amount of the dampening effect still to come, the ECB’s road to a strong recovery remains obscured by the legacy of its inflation-fighting policies.
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