Change the mortgage to a fixed rate or pay off debt if possible: options for households in the face of high inflation
Since last summer, households have faced a sharp rise in the prices of electricity and gas, which is causing, in turn, a historic increase in inflation in many of the products that are usually consumed. To this will presumably be added the increase in interest rates that will make mortgages more expensive for millions of families who borrowed to buy their home, putting an end to six years of respite with the Euribor in negative. The INE confirmed this Wednesday an inflation of 9.8% in March, highest since 1985.
The situation comes in a complicated context for many households, especially for those with lower income, who are the most affected by high inflation, which is popularly known as the poor man's tax. However, the current situation is very different from that of the 2008 financial crisis. Last Tuesday, the Bank of Spain reported that the financial wealth of families – the difference between what they have saved and what they owe – has increased by 9.4% in 2021 and is at pre-pandemic levels. This is fundamentally due to the large savings cushions that many households have had during the crisis caused by the coronavirus.
Now, families must make decisions to face the period of high inflation that is being experienced, trying to protect themselves as much as possible from its effects. Of course, not all are in the same situation, although the experts outline some general aspects that can be taken into account.
What to do with the mortgage?
Spain is a country where housing is eminently enjoyed as property, despite the growth in rental prices. For this reason, a rise in inflation that causes an increase in mortgage interest rates has a clear effect on the household economy. Although in recent years banks have prioritized the sale of these loans at a fixed rate, it is estimated that around three quarters of the debt that families have is at a variable rate. The Euribor touched positive ground for the first time this week after more than six years, confirming the forecasts of the analysts.
"The Euribor is going to rise for sure and the mortgage is going to be more expensive," says Raymond Torres, director of the Funcas situation, who considers that in a period like the current one, families with variable rate loans should try to make a transfer to the type permanent. "In some cases, the cost of this operation is very low," he notes.
Another option proposed by Torres and shared by other experts is to pay off part of that debt. "If you have liquidity," as Antonio Pedraza, a member of the General Council of Economists, clarifies. "Liquidity right now is useless, inflation is corroding it," says the economist, who points out that the savings they have have lost purchasing power with the rise in prices and allocating them to pay off the mortgage may be a good option. .
And with the new loans?
The mortgage market has had its best year in 2021 in more than a decade, and the pace in early 2022 data appears to be holding. Since weeks before the crisis in Ukraine, the bank has changed its offer by raising prices at the fixed rate. However, experts recommend paying attention to this and not getting carried away by new offers. "When a bank encourages and does everything possible to attract a client to the variable rate, it is to transfer the risk to him," says Torres, who recommends looking for fixed-rate mortgages.
"Although fixed mortgages are becoming more expensive, it is a good time to anchor the risks and reduce them," adds the Funcas economist, who acknowledges that "it may seem that it is becoming more expensive at first glance", but points out that the future evolution will be "more pronounced in variable mortgages. Pedraza agrees with this idea, which emphasizes that it is better to "tie a low fixed rate" when contracting a new mortgage. Both add two details. The first, that if you opt for a loan linked to the Euribor, the flexibility in the future of transferring it to a fixed rate is allowed. The second, that the opening costs are monitored.
How to use the savings?
According to the Bank of Spain, households ended last year with almost 2.7 trillion euros in financial assets (cash, deposits, shares or mutual funds), 7% more than in 2020. As with everything, these are global figures and many households live in a very different situation, although the data serve to quantify the relevance of the savings that families in Spain have accumulated. At a time of high inflation, economists remind us that deposits, the main savings reserve, lose purchasing power. Currently the banks are not remunerating this money and if prices go up, you can buy less with it.
Torres suggests that one option is to use part of that savings, if you have the economic capacity, to invest it in public debt bonds. "It is a very liquid market and it can be sold," says the economist, who suggests that it is necessary to "diversify risks." For people who have a greater appetite for risk, he proposes investment funds offered by banks or investing in raw materials. Pedraza is more skeptical about the bonds and their future profitability. "The only alternative is to take risks," he points out, encouraging the search for other investments that can produce more revenue.
Funcas' economist adds a nuance. Not all prices rise equally and, with respect to these products, deposits do not lose value in the same way. He points out, for example, housing, which does not rise as much as the CPI, or some services such as education, where prices do not evolve in the same direction either. That is, if savings are reserved for these goods and services, the loss in value is less.
Is it advisable to advance purchases that were planned?
This is a recurring question in periods of high inflation and when it is expected to continue to rise and is related to the above. If savings may lose value and prices may continue to rise, it may be better to move up a planned purchase now rather than put it off for a few months. "Consuming durable goods is a way to maintain the value of your savings," says Torres. This includes issues such as an appliance, a car or the renovation of a home. Regarding the latter, he defends that it is a way of using savings in one's own home in a way that "improves its market value, its use value and the well-being of the family."
Pedraza, from the Council of Economists, points out that this search to advance purchases in anticipation of rising prices is what is already being observed in the housing market. People who had planned to buy a house and anticipating that the cost will be higher —both in prices and in interest—, decide to go ahead. This economist supports these decisions more than those of advancing purchases of durable goods or vehicles.
In any case, both agree that making purchases in advance, yes, but only when necessary. "It should be advanced if they are matters of necessity and not spurious or speculative," says Torres. "If it is not necessary to buy, it is not advisable to do so now," supports Pedraza.
What to do with consumption?
An issue that has been in vogue in recent weeks has been that of stocking up when shopping at the supermarket, coinciding with supply problems due to the truckers' strike last month. Torres points out that the stockpiling of non-perishable products is common in countries with skyrocketing inflation, citing Argentina as an example. "People have internalized this very much and there is no saving. Either it is done in foreign currency or it accumulates and stores products on which the price can rise," he points out. However, he warns that, "although it may make sense", if it is something that everyone does at the same time "it raises the price and destabilizes the economy".
This economist proposes trying to find a fixed price in all supply contracts (electricity, gas, internet, telephone, etc.), which allows for a forecast of how much will be spent at the end of the month and avoid surprises. He also proposes, if possible, "adapt consumption to what is happening": for example, using the car only when necessary to reduce fuel costs. "In general, discipline is important for families with tight budgets when making purchases. The problem with inflation is that you may not realize when you do it and notice it at the end of the month," he points out. For this reason, he recommends "paying more attention to the price and where you buy it." "Inflation close to zero has made us unconcerned about prices," he adds.
Pedraza recognizes that there is a part of consumption that is "inevitable", in relation to food. However, beyond that, he encourages families to eliminate "superfluous" expenses, "remove expenses that come in every month and are not necessary." And he points out as a key to review the expenses of credit cards and revolving. Many families "are hooked on these loans that have very high interest rates, if you have liquidity they are the first debts that should be removed," he concludes.
