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Spain's American-Style Fixed-Rate Loans Break the Mold

(Bloomberg) — Spanish banks are trying to persuade homebuyers to change their habits by taking out American-style fixed-rate mortgages for as long as 30 years.

Banco de Sabadell SA, Spain’s fifth-biggest bank, in January began marketing a 30-year fixed-rate mortgage at 3.95 percent. CaixaBank SA, the No. 3 lender, offers mortgages of up to 10 years at a rate of 2.5 percent to 3 percent. They’re breaking the mold in a country where 90 percent of outstanding mortgages are variable rate.

The banks are trying to bolster income from mortgage lending amid signs that Spain’s housing market is emerging from a seven-year slump. The euro-area interbank rate known as Euribor, used to price most floating-rate Spanish mortgages, has plunged to less than 0.3 percent from more than 5 percent in 2008. That’s stripped banks of the revenue earned on the 13.8 million mortgages they made during the 10-year real estate boom that ended in 2008.

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“Banks have improved their balance sheets and they are in a better capital position now,” said Jose Luis Martinez Campuzano, a strategist at Citigroup Bank in Madrid. “But in a low interest-rate environment, it’s necessary for them to be more profitable.”

In September, the European Central Bank cut its benchmark interest rate, which influences Euribor, to a record low of 0.05 percent from 0.15 percent. A trillion-euro quantitative easing program, announced on Jan. 22, may keep rates low for some time.

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Banco Sabadell expects that 20 percent of all its new mortgages this year will be fixed-rate loans, said Albert Figueras, its director of banking for retail clients.

Mutually Beneficial

“With low interest rates and long-term loans, the expectation is that Euribor will go up again in the future,” he said. “Securing a fixed rate now is in the interest of both the client and the bank.”

Sabadell hedges the risk of higher rates in the future through derivative contracts, Figuera said.

While 30-year mortgages are common in the U.S., most European homebuyers take out floating rate or shorter fixed-rate loans. In Germany, the average length is 12 years, while U.K. fixed-rate mortgages are typically for two to five years.

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Sabadell also offers a 15-year mortgage at a fixed rate of 3.5 percent. That’s close to the average cost for Spanish variable-rate mortgage loans since the Bank of Spain started collecting data in 2003.

Interest-rate increases brought a lot of “nasty surprises” when the 12-month Euribor rose from a 15-year average of 2.64 percent to a record of 5.39 percent in July 2008, according to Juan Villen, head of mortgage services at property website Idealista.com.

Surprise Increase

“Many argue that low rates will continue for a long time,” said Villen. “However, history has shown us that the Euribor can rise without warning and very quickly, and unfortunately wages do not rise at the same speed.”

The difference in monthly mortgage payments between a 2.64 percent Euribor and a 5.39 percent rate on a 100,000-euro loan over 30 years with a spread of 1.5 percent oscillated between an average of 485.52 euros and a maximum of 658 euros, according to a mortgage simulator on the website of the Spanish Mortgage Association.

Lenders have foreclosed on about 330,000 families in Spain since 2007, according to Plataforma de los Afectados por la Hipoteca, a group known as PAH that helps people who have lost their homes to lenders. There were 17,472 foreclosures in the first half of 2014, down from 19,567 a year earlier, according to data compiled by the Bank of Spain.

Lending Rebounds

Spanish mortgage lending, which jumped 14 percent in November from a year earlier, is still too weak to ensure new loans are replenished at the same rate as existing ones come due. The number of loans granted is only about 13 percent of the total at the peak of the boom, data from Spain’s National Statistics Institute show.

“Banks are lending again but if it were up to them they would be giving out double the amount in order to replenish their books” Villen said. “They are fighting over a market which is their bread and butter, but will never be as big as it was at the peak of the lending boom.”

Spanish home sales rose 22 percent to 253,421 in the first nine months of 2014, according to data compiled by the statistics institute. In 2006, a record 955,186 properties were sold. The statistics institute is scheduled to publish annual sales figures on Feb. 10.

Tightening Spreads

Some banks are tightening spreads on variable-rate mortgages to attract clients back to the market. Banco Bilbao Vizcaya Argentaria SA, Spain’s second-largest lender, offers home loans at Euribor plus 1.6 percent. Banco Popular Espanol SA, the No. 6 bank, provides mortgages at Euribor plus 1.55 percent.

“The problem with cutting spreads is that it could push banks’ margins down in the short- and medium-term,” said Nuria Alvarez, an analyst at Renta 4. “This hasn’t had an obvious impact on banks’ earnings so far, but the risk is there.”

The Spanish mortgage market is going to be “enormously” competitive this year, said Maria Dolores Dancausa, chief executive officer of Bankinter SA, which tripled new mortgage lending last year to 1.6 billion euros.

“Mortgages are hugely profitable in the right conditions,” Dancausa said during a presentation in Madrid last week. Spanish banks “won’t lose their heads” when it comes to reducing mortgage spreads, she said.

Market Share

In 2013, variable-rate loans accounted for about two-thirds of all new mortgages taken out by Spanish homeowners, according to Spain’s Mortgage Association.

Fixed-rate mortgages probably won’t grab a large share of the market, according to Jaume Puig, general director of Barcelona-based brokerage GVC Gaesco Gestion. “It will probably only have limited commercial success because customers see Euribor at such low levels now,” he said.

Villen of Idealista.com isn’t so sure. He said while a floating-rate mortgage is beneficial in the current interest rate environment, no one knows where the index will be in a year or two.

“Why speculate on the future of interest rates when we have no ability whatsoever to influence our income,” Villen said. “Surely it’s better to live with the certainty of a monthly fee that will never change.”

To contact the reporters on this story: Sharon Smyth in Madrid at [email protected]; Macarena Munoz in Madrid at [email protected]

To contact the editor responsible for this story: Andrew Blackman at [email protected] Andrew Blackman, Charles Penty, Vincent Bielski

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