## Interest rates explained

Most mortgages in Spain are variable rates mortgages. In Spain, this means that the bank will fix the interest rate you pay on your mortgage for one year at the time.

##### How will the mortgage rate be adjusted?

Every year (always on the same date), the bank will adjust the interest you pay using the Euribor 12-month reference rate at that date. Other reference rates (such as Euribor 3 or 6 months or IRPH) can be agreed, but this is not very common.

On the yearly adjustments, the interest rate for the next year is calculated by adding a fixed percentage on top of the reference rate at the time of the adjustment.

##### Example

If your agreed mark-up is 2.0% (fixed mark-up for the full term of the mortgage) and the Euribor 12-month reference rate is 0,1%, the interest rate you will pay on your mortgage for the following year will be 2.0% (mark-up) + 0.1% (Reference rate) = 2.1% (final rate).

-0.359 %
August 2020

-0.359 %
August 2020

5.393 %
July 2008

##### Fixed rate mortgages in Spain

With the extremely low interest rates in the euro area combined with a common belief in the banking sector that the rates will remain low for a long time, fixed rate mortgages for 10, 15, 20 and 25 years has now become more common.

If you opt for a fixed rate mortgage, you will fix the interest rate for the full mortgage amount and from the start of the period.

You also have an option to have a fixed rate for the first years (e.g. 10 years) and then a variable rate (adjusted annually) for the remaining term.

##### Why take a fixed rate mortgage

The advantage of a fixed term mortgage is that you know exactly what you must pay during the fixed rate period and it is easy to do your budget.

##### Why not to take a fixed rate mortgage

The disadvantage is that the Early Repayment Charges normally are higher on fixed rate mortgages than on variable rate mortgages.
In addition, the interest rate, at least for the first years (we do not know how the variable rate will be in the future), are higher on a fixed rate mortgage than on similar variable rate one.

## What is Euribor?

Euribor is an interest reference rate used in the EU and is published every working day.
Close to all variable interest mortgages in Spain (94%) are now linked to the Euribor rate.

##### Who is setting the Euribor rate?

Each working day a panel of 20 large banks across Europe report on what they believe one prime bank will quote another prime bank to borrow unsecured funds in euros.

Hence, the Euribor rates are funding/borrowing rates between banks, so called interbank rates, and not a rate for the private market.

##### How is it calculated?

At 11:00 CET when all the panel banks have reported their numbers, 15% of the highest and lowest rates are taken off and an average of the remaining rates are calculated. The panel banks reports on a wide range of maturities (such as 1 week, 1-month, 3-month, 6-month and 12-month rates).

##### Why is it important?

Since the cost of borrowing money between banks has been a very important factor for the total costs a bank has when it offers mortgages to their customers, Euribor has quickly grown in importance since the launch in 1999 (together with the launch of the Euro) as an index for mortgages in Europe.

The rates used for fixing mortgage rates (and shown here), is the average of all the daily quotes in that month.

The daily Euribor rate is published by the European Money Markets Institute (EMMI) based in Brussels.
The monthly rates used for mortgages is published by Banco de España (the central bank in Spain).

## Thinking of a mortgage?

Do our free mortgage study to see how the mortgage could look like.