Donald Markwardt
Senior Research Analyst, International Finance and Macroeconomics Research
Capital Flows and Systemic Risk
Donald Markwardt is a senior research analyst in international finance and macroeconomics at the Milken Institute. He studies topics relating to systemic risk, capital flows and investment. Concentrating on systemic risk assessment in the financial system, his recent work focuses on liquidity and financial stability in the asset management industry.
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Spain looks to fix its real estate lending

By: Donald Markwardt
February 25, 2015

Fixed-rate mortgage offerings by some of Spain’s leading banks are making a splash in the country’s home-loan marketplace. In a country where over 90 percent of consumers have traditionally relied on variable-rate loans, these products are noteworthy because of their fixed-rate and their length (up to 30 years). This is in stark contrast to the U.S., where the practice of locking in rates for 10 years to 30 years is the standard rather than the exception.

Debt overhang and market distortions left over from Spain’s real estate bubble more than five years ago are blamed for most of the country’s recent economic woes, so the introduction of new or innovative mortgage products meant to ratchet up lending volume is likely to be met with suspicion, at best.

Indeed, Spanish mortgage lending has picked up, and total mortgage capital loaned on a year-over-year basis has turned positive for the first time since 2007. The increasing prevalence of fixed-rate mortgages is, at least partly, a response to the increased pressure on bank lending margins, as variable-rate mortgages have come down to as low as 1 percent (plus the variable component Euribor).

Spain CotW

But there’s reason to believe these fixed-rate mortgages meet a real consumer need, especially for Spanish homebuyers who were burned when  variable rates (12-month Euribor) spiked from 2.0 percent in 2005 to 5.5 percent in 2008. That jump  significantly increased mortgage payments for homeowners, dramatically cut demand for new home loans, exacerbating the housing collapse. The ability to lock in a fixed mortgage payment over the life of a loan provides risk-averse homeowners a sense of security. The products also make sense for banks, which are using derivatives to hedge their additional exposure to the risk of rising interest rates. These hedges have become substantially cheaper due to market participants discounting the risk of any significant rate rises or inflation risks in the intermediate term, owing to low growth prospects and the ECB’s announcement of its quantitative easing program. Cheaper hedges mean banks can offer fixed-rates, such as 2.5 percent for 10-year fixed or 4 percent for a 30-year mortgage, that are relatively competitive with variable-rate products.

In the end, this doesn’t yet constitute a sea change in Spanish mortgage conventions: Sabadell, one of the country’s largest banks and a leading provider of these new products, expects fixed-rate loans to represent one fifth of its new mortgages in 2015. However, the trend merits watching as Spanish consumers look for safer alternatives in Spain’s post-recession financial landscape.