This is a question that many families ask themselves, how to choose the mortgage rate with the crisis that will come?
For most people (unfortunately) when they have to buy a house they have to face the word “mortgage” and as many do they start long searches on Google to find the best deals without understanding the “mechanics”.
I hope you know that there is an inverse correlation between mortgage rates and house price trends, it is very simple to understand because when interest rates are low there is a higher demand for real estate and prices rise. Obviously not in all places because the most important cities such as Milan, Rome prices even in times of covid rise especially in luxurious areas.
When rates rise due to central bank monetary policies, the chances of a slowdown in the housing market are much higher.
What affects economic growth?
GDP because if it grows without creating too much inflation and rates remain low this can be a positive element for the purchase of new properties and obviously if a GDP does not grow we find the opposite effect.
The first advice before looking for the house and doing a small analysis on the economic scenario, I often see friends who neglect these factors of scenario analysis, this then leads to errors in the stipulation of the contract, it is true that no one can know what the central banks will do but if you follow the financial markets it is easier to guess the next moves of the European Central Bank (for example).
Other aspects must also be considered when choosing the next mortgage you are going to make:
- Personal factor (life change)
- Income (long-term investment)
Before “clicking” on the choice of the mortgage that will accompany you for 20/30 years or the period that will be, do we have to analyze the economic situation?
What do economic indicators tell us?
Economy in slowdown (I’m talking about Europe) amplified by a strong inflation that the result will lead to be in the next 2/3 years to a stagflation that has not been seen for 50/60 years.
The long-term reference rate is Eurirs (interest rate swap) for fixed-rate mortgages, in this market context IRS rates decrease as the maturity is extended (example 10-year IRS 3% is higher than 20-year 2.8%).
People who choose the fixed rate must know the trend of the Eurirs because it is the basis for the calculation that will determine the mortgage installment.
Is interest rate swap a forecast indicator that recession is coming?
The answer is yes because rates fall as the duration increases, so translated the risk of uncertainty for the future is higher. Specifically, what impacts those who tomorrow, for example, will take out a mortgage?
With the same spread it is cheaper at this time to take out a 30-year mortgage rather than 20/10 years., This choice can be interesting for people who do not intend to expose themselves financially for that duration but to make an entry into the mortgage market with the lowest fixed rate with the possibility of when the economic scenario will be better to renegotiate with the bank or subrogate the duration and guarantee a better rate.