ECONOMY

Households increasingly turn to fixed-rate mortgage loans

Until quite recently, the constant decline in interest rates dictated that people interested in buying a house take a floating-rate mortgage to take advantage of ever-lower rates. Nowadays, a more careful approach is required, because, after four years of a constant declines, rates may have reached a historic low. Perhaps only a significant drop in inflation – which hovers now slightly above 4 percent – could lead to a further round of rate cuts. Even though the European Central Bank (ECB) is expected to cut its main intervention rate by half a percentage point by the end of the year, it is not certain that this will affect mortgage rates in Greece. Besides, such a loan must be seen in a perspective of 10, 15, even 20 years, something that is beyond anyone’s forecasting powers. Heads of big banks’ mortgage loan departments say that loan-takers may see one more round of interest-rate cuts this year, but no one can predict what will happen in the medium term, least of all guarantee that an environment of low rates will be sustained. Such a thought is especially prevalent at Alpha Bank, the bank that first introduced the mixed-mortgage credit – with a fixed rate over the first year and a floating rate thereafter – and which became the target of severe criticism last year when, despite a round of cuts by the ECB, it chose to raise its main floating rate. When it did so, the bank’s management called on customers to take advantage of the «historically low» rates and take out fixed rate loans. A top manager at Alpha’s mortgage credit department tells Kathimerini that about 65 to 70 percent of customers choose fixed loan rates anyway. The rationale behind that choice is that households want to know the exact amount they are going to spend on loan repayments each month. This reassurance, the manager says, is even more important than any benefits that could result from taking out a floating-rate loan in an environment of falling rates. At any rate, Alpha managers say, the bank is flexible, providing customers with the flexibility of switching from one type of loan to another, without penalties. At National Bank, managers say that loan-takers will benefit from a decline in rates this year and that they should seriously consider floating-rate loans. At present, less than 10 percent of National’s customers choose to do so. One product that National offers is a floating rate tied to the Euribor (the European interbank loan offer rate) plus a spread of 1.5 to 3 percentage points, according to the client’s credit rating. With the 3-month Euribor at 2.5 percent, this means a rate of 4 to 5.50 percent. Several other banks have introduced Euribor-related loan rates. One is Citibank, whose program is tied to the 6-month Euribor plus a spread of 1.70 percent, making the rate 4.23 percent at present. EFG Eurobank managers side with Alpha’s in believing that rates approach historic lows and point out the increasing choice of fixed-rate loans, which is also a trend among European households. Those who choose fixed-rate loans now, they say, will be better off in the case of an economic downturn, which is likely.