Mortgage rates Italy: what does the ECB's rise in rates to 2% mean for Italian mortgages?

On 27th October 2022, the ECB once again increased interest rates by a further 0.75 per cent, bringing the total cost of money to 2 per cent, a level not seen for a very long time. What does this mean for mortgage repayments in Italy? For those who have had a fixed-rate mortgage for some time, little or nothing; for those who have to take out a new contract in the near future, or who have a variable-rate mortgage, the consequences will instead be felt in terms of higher costs. Let's have a closer look at what the ECB's rise in rates to 2% means for Italian mortgages.

Changes in the Euribor expected

"To see what the actual increase in instalments will be, we will have to wait and see how the Euribor will move, because if it is true that the index changes on the basis of expectations of ECB rates, it is not certain that it will do so to the same extent as the central bank's rates," explains Ivano Cresto, Managing Director of financing products at Facile.it. "Without prejudice to the fact that the impact will be different for each borrower depending on the residual amount of the loan and the number of instalments still to be paid; the closer you are to the end of the repayment plan, the smaller the effect on instalments will be."

ECB rates at 2 per cent, by how much mortgage instalments will increase

According to Facile.it's simulations, considering an average variable mortgage, if the Euribor were to rise in line with the new increase in ECB rates, the monthly instalment would rise by almost 50 euros which, added to the previous increases, would bring the total increase to almost 150 euros more than at the beginning of the year.

An average borrower in Italy who has taken out a 126,000 euro variable loan in January 2022 will therefore find themselves paying an instalment of 604 euros, i.e. 32 per cent more than the first instalment. If, on the other hand, the Euribor increase were smaller and equal to 50 basis points, the instalment would rise to almost 590 euros (some 32 euros more than today, 132 euros more than at the beginning of the year). If, however, one looks at the Euribor Futures, which represent the expectation that traders have of the index's development over the next few years, an even larger possible increase emerges. According to these forecasts, by the end of the year the (3-month) Euribor index will reach 2.24%; if this is the case, the simulated mortgage instalment would even rise to 630 euros, i.e. 174 euros more than at the beginning of the year.

Mortgage rates Italy 2022

In 2022 the starting rate on mortgages in Italy signed in January and used in Facile.it's analysis is 0.67%, corresponding to a monthly instalment of 456 euros. In the first part of 2022, monthly mortgage instalments rose slightly (from January to June the increase was only 13 euros), but after the rate increases by the ECB (+0.50% in July and +0.75% in September) the indexes of variable mortgages skyrocketed so much that, in October 2022, instalments reached about 556 euros, i.e. about 100 euros more than the initial amount.

Fixed and variable mortgages in Italy, increases after the ECB

The situation is very different depending on whether you have a fixed or variable rate mortgage in Italy. According to Codacons, the 0.75 point increase in interest rates decided today by the ECB represents a blow for Italian families. Considering an average variable-rate mortgage of between 125,000 and 150,000 euros, i.e. the amount most requested in Italy by those taking out a loan to buy a house, the monthly instalment will rise by between 40 and 50 euros. However, if all the increases imposed by the European Central Bank in recent months are taken into account, the monthly instalment of a variable-rate mortgage will rise by between 120 and 150 euros overall compared to what was paid last year, with an impact on families of between+1,440 and +1,800 euros per year.

"We had predicted last August the sting on mortgages that would be triggered in the autumn, and unfortunately our fears have been confirmed," says president Carlo Rienzi. The increase in the cost of financing is thus added to the high utility bills and the price emergency, further aggravating the accounts of Italians: this opens up another dangerous front, that of late payment of instalments by families in difficulty, crushed by the energy emergency, skyrocketing inflation and now also by increasingly expensive and difficult mortgages to pay.

More expensive ECB rates, what happens to mortgages in Italy?

Not everyone, however, expects a significant impact on mortgages after the increase in ECB rates, which, according to Alessio Santarelli, General Manager of Gruppo MutuiOnline and CEO of MutuiOnline SpA, was widely announced. "The effect of the two previous increases was substantially neutral," he comments. "In the third quarter, loans disbursed for purchases, according to data from Assofin, fell slightly by 4% compared to the previous year, but remain up by 26% compared to 2019, before the pandemic. The rise in rates then has little impact on the creditworthiness and bankability of potential buyers, prompting them to speed up the purchase process to grab good deals for fear that rates will rise again. Moreover, it is important to remember that the Italian real estate market is healthy, with an average property cost growth of only 6%; the situation is different in other countries, both in Europe and overseas, where the increase in the cost of real estate has been over 30% in the last three years and we can expect a reversal of the market trend".

Mortgage rates and ECB rates

However, even MutuiOnline admits that there will be increases in mortgage rates as a result of the rate hike. A 39-year-old office worker in Italy applying for a 140,000 euro mortgage for a 200,000 euro property, i.e. with a Loan To Value (LTV) of 70%, with a term of 20 years, for example, would until yesterday have had the best fixed-rate offer with a rate of 3.36% and monthly payment of 802 euros. With the 0.75 increase, the instalment would become 857 euros, thus increasing by 7%, and costing over 13,000 euros more over 20 years.

The variable rate would increase proportionally more: the best offer at the moment envisages a payment of 641 euros per month, with a rate of 0.95%, which would become 689 euros if the rate rose to 1.70%, requiring an outlay of over 11,000 euros more.

More expensive mortgage instalments, Italians in difficulty

As confirmed by the survey commissioned by Facile.it to mUp Research and Norstat, 2.4 million Italians and residents in Italy with a variable-rate mortgage declared that they had difficulty, in the first nine months of the year, in repaying the loan, and as many as 218,000 borrowers had to skip one or more instalments.

A phenomenon - reads the survey carried out on a representative sample of the national population - that could increase, so much so that there are more than 780,000 borrowers (between those who have a fixed-rate loan and those who have a variable-rate one) who have declared that, if prices continue to rise, they could be forced to skip the next instalments.

Will the ECB increase rates again?

Will the ECB rate hike stop or continue? According to Altaf Kassam, EMEA Head of Investment Strategy and Research at State Street Global Advisors, "this second 75bp move brings the deposit rate to the middle of the 1-2% range for the neutral rate quoted by ECB officials, which should provide a natural point to slow the pace of increases, given the high probability of a recession in the Eurozone in Q4. Consequently, we expect the ECB to slow the pace of rate hikes, "only" increasing by another 50 percentage points in December, reaching a deposit rate of 2% by the end of the year. As the ECB's revised forecasts have shown, 2023 promises to be a difficult year and the central bank needs as much flexibility as possible.