Real estate financing
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Real Estate Watch
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Outlook for the debt burden
The increase in indebtedness puts households in a more vulnerable position than in the past in respect of variations in interest rates. In this context, the change in the bias of the ECB's monetary policy will put more pressure on the household debt burden. At least 72% of Spanish households' outstanding debt is at a floating rate, which implies that even without contracting new debt, households are going to need more resources to cope with their indebtedness.
However, the impact of the increases in interest rates on the loan portfolio will be gradual, which will enable households to adapt to the increase in their debt burden. Thus, when BBVA Economic Research Department's scenario for interest rates, income and lending is added and maintaining a trend of increasing the remaining period in the mortgage portfolio similar to what has been witnessed in recent years, it is observed that between 2005 and 2007, the debt burden could increase by 2.7 percentage points of disposable income. It should be emphasized that, as occurred in the past few years, the greater part of this increase would be explained by the on-going buoyancy of lending. In fact, the higher interest rates will only pressure the debt burden with a cumulative increase of 0.8 percentage points of disposable income. Moreover, it should be borne in mind that the performance of financing is in turn dependent on the interest rate scenario and, consequently, more aggressive scenarios of increases in interest rates would reduce demand for loans and, thus, their contribution to the debt burden.
In short, from a macroeconomic perspective, it cannot be forecast that the turnaround in monetary policy will have severe consequences for the financial situation of Spanish households.
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mortgage equity withdrawal, i.e. consumer financing through the mortgage, while in Germany this product is as little developed as it is in Spain.
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Moreover, when the burden from interest and the burden from the principal in this type of financing are compared, it is observed that Spanish households have lower mortgage interest payments in relation to the burden from the principal, illustrating the lower mortgage rates in Spain. However, it should be remembered that the cost of financing reached record lows in the last three years and the heavy weight of mortgage financing at a variable rate means that the debt burden is much more sensitive to the contemporary level of short-term interest rates.
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