Understanding the Rapid Rise and Slow Decline of Mortgage Rates

Why Did Mortgage Payments Rise Rapidly but Now Decrease Slowly?

The reduction in ECB interest rates has eased the pressure on families with variable-rate mortgages, but the impact is less significant than one might expect.
Following three rate cuts from the ECB between June and October, the average mortgage payment has decreased by about 8.7%.
This is a markedly slower pace compared to the staggering 32% increase experienced between June and December 2022.

So, why is this happening? The answer lies in the mechanisms that determine how Euribor indices affect mortgage payments.

Reasons for the slow decrease in mortgage payments

Here are a few reasons why mortgage payments rose quickly but are now decreasing slowly:

1) Euribor Index Measurement Methods

Variable rates consist of two components: the Euribor index, dictated by market conditions, and the spread set by the bank in the mortgage agreement.
However, banks utilize different methodologies to measure the Euribor, leading to substantial discrepancies in mortgage payment calculations.
For instance, some institutions measure the rate at the end of the month, while others use a monthly average or rely on the mid-month Euribor.
As a result, rate updates lag behind the actual decline in Euribor, and those with quarterly indexed mortgages might even see a slight increase due to previous Euribor readings.

2) The Bank’s Applied Spread

The spread represents the fixed component of the variable rate, set by the bank during the mortgage contract.
In periods of rising rates, increases in Euribor directly and immediately affect payments.
Conversely, when rates fall, the decrease’s impact can be mitigated by this fixed component.
Consequently, the spread may keep mortgage payments at higher levels than anticipated, based solely on Euribor’s decline.
Furthermore, spreads can vary across different banks, affecting how swiftly the drop in rates translates into actual savings for borrowers.

3) The French Amortization Plan Effect

Another crucial factor is the dynamics of the French amortization method.
Most Italian mortgages follow this plan, which features constant payments over time, with a higher proportion of interest in the early years and gradually increasing capital repayments.
This structure means that even when Euribor indices drop, the monthly payment may not see a significant reduction due to the already reduced interest component.
As borrowers approach mortgage maturity, the positive effects of falling rates on monthly payments slow down.

Future Perspectives in the Mortgage Market

In the last two years, the mortgage market has experienced significant fluctuations, mirroring the movements of Euribor rates and ECB monetary policies.
From January 2022 to October 2024, the monthly payment of an average mortgage of €126,000 over 25 years jumped from €456 to €685, peaking at €752 between December 2023 and February 2024.
This increase mainly stemmed from the rapid rise of Euribor rates.

However, by July 2024, a gradual reduction in payments was noted, thanks to the ECB’s change in direction, which began decreasing interest rates in June, albeit at a slower pace than the previous increases.

Current forecasts suggest that this trend of declining rates will continue in upcoming ECB meetings.
According to Facile.it’s simulations, a further cut of 25 basis points in December may see monthly payments decrease by approximately €18 by early 2025.
Overall, possibilities indicate a reduction of €95 by year-end 2025, resulting in a projected monthly payment of €620, down from €714 in October 2024, which would provide substantial relief to borrowers.

Nevertheless, the future of variable rates remains uncertain, with market volatility and unpredictable central bank decisions complicating long-term forecasts.
Borrowers wishing to lower their payments more rapidly might consider transitioning to a fixed rate, taking advantage of favorable conditions currently offered by banks.