What happens when interest rates raise? How big a problem are higher interest rates for Italy? As expected, the European Central Bank raised interest rates by 0.75 per cent on top of the previous increase of 0.50, bringing the level to 1.25 per cent. What does this mean for the pockets of Italians, especially those who have to pay a mortgage? After the latest interest rate hike, this is what the latest rise in interest rates means for mortgage holders in Italy and the effects of the interest rate increase on home mortgage payments.
Inflation too high, ECB raises rates to 1.25 per cent
The ECB not only raised rates by a further 0.75 per cent on 8th September 2022, but anticipates that the hikes are not over. They will in fact "raise interest rates further at upcoming meetings to dampen demand and guard against the risk of a persistent increase in expected inflation". In fact, inflation is deemed "too high" and will remain so "for a prolonged period of time". A polite hint at the hard times ahead given the international energy situation, which will only worsen an already rising price situation.
Indeed, preliminary forecasts for average inflation in the eurozone stand at 9.1 per cent. The ECB has revised upwards its forecasts precisely on the cost of living: Frankfurt now expects 8.1% this year, 5.5% in 2023 and 2.3% in 2024. Three months ago they were forecasting 2022 inflation at 6.8 %, in 2023 at 3.5 % and in 2024 at 2.1 %. Growth forecasts were cut in the opposite direction: 3.1% in 2022, 0.9% in 2023 and 1.9% in 2024.
Will European interest rates go up more in 2022?
ECB rates will continue to rise in the future, but by how much? "Looking ahead," explains Altaf Kassam, EMEA Head of Investment Strategy & Research at State Street Global Advisors, "we expect the ECB to slow the pace of rate hikes, increasing by another 50 percentage points in October and 25 percentage points in December, to reach an interest rate (on deposits) of 1.50 per cent by the end of the year. September's "super-increase" is more of a catch-up move than a forward-looking one, but it should give the ECB some breathing space and allow it to focus on other issues, such as the possible end of the Asset Purchase Programme's reinvestment and the activation of the anti-spread shield (TPI). As the ECB's forecast review shows, 2023 is shaping up to be a difficult year and the central bank needs all the flexibility it can get.
How do rising interest rates affect mortgages in Italy?
The increase in ECB rates will have no effect on existing fixed-rate mortgages, but it could have an effect on new contracts and, above all, on the variable-rate mortgages without a cap currently in existence (let us remember that these account for about 10 per cent of the total, according to the Bank of Italy, also thanks to the long period of zero rates that has pushed fixed-rate contracts).
According to Codacons, the 0.75 point increase in interest rates decided by the ECB represents a "blow" for Italian families who have taken out a variable-rate mortgage. Assuming a 150,000 euro 25-year mortgage - one of the most popular types in Italy - and if the rate increase is passed on entirely to the loan, the monthly instalment will go from the current 590 euros to 643 euros, an increase of +53 euros per month, +636 euros per year.
On a 200,000 euro mortgage, again at 25 years, the monthly instalment will go from 787 euros to 858 euros, +71 euros per month, +852 euros per year - analyses Codacons.
It is worse for those who have taken out heavier and longer-term loans: on a 250,000 euro 30-year mortgage, the monthly instalment rises from 847 euros to 937 euros, an increase of +90 euros per month and a higher outlay of 1,080 euros on an annual basis.
How much mortgage instalments will increase with rising ECB rates
"In order to quantify the real extent of the increases, it is necessary to wait and see what impact the ECB's decisions will have on the Euribor; it should be remembered that this index tends to move together with the Central Bank's rates, but it is not certain that it will do so in a specular manner," explains Ivano Cresto, Managing Director of Facile.it's financing products.
"Even in the case of price rises, the actual impact on monthly instalments will depend on the characteristics of each mortgage. For those who have been paying the loan for years, for example, the increase will be more modest, while for those who have recently taken out a mortgage, it could be more substantial as interest is calculated on the residual debt. In any case, if you are worried that you may be in difficulty with repayments, the advice is not to procrastinate and to contact your bank, or an expert adviser, immediately to replace your mortgage with a more sustainable solution".
- For more information on mortgages in Italy and to calculate your mortgage, head to idealista/mutui where our experts will help you find the best mortgage.