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Spain Homeowners Face Squeeze as Mortgage Rates Rise

Spanish homeowners will face higher mortgage repayments after the benchmark rate for loans last month posted its first annual gain since October 2008.

The benchmark rate for most of the country’s home loans, 12-month Euribor, rose to 1.42 percent in August from 1.33 percent a year earlier, the Bank of Spain said today on its website. That will further stretch the finances of Anabel Ruiz, who already spends two-thirds of her 1,000 euro ($1,271) monthly salary on making payments on a 30-year mortgage that runs until 2036.

“It’s going to make a desperate situation even more critical,” said Ruiz, 43, who works in an accounts department. “It could mean I lose my apartment and we all end up living under a bridge.”

Because almost nine out of every 10 new Spanish mortgages are floating rate, increases in Euribor may start to squeeze demand in an economy struggling to emerge from the deepest recession in 60 years. Higher mortgage payments as loans start to reset come as Spanish households adjust to an increase in sales taxes and a jobless rate above 20 percent.

“It’s another headwind for Spain among many,” said Kenneth Wattret, chief euro-area economist at BNP Paribas. “The turning point for interest rates can present a problem.”

Repossession petitions handled by the Spanish courts jumped to 27,621 in the first quarter, from 23,433 a year earlier and 5,688 in the same period of 2007, according to data from the General Council of the Judicial Power.

Rate Increases

Repayments on a mortgage of 171,000 euros, the average size of a home loan in Madrid according to the government’s statistics institute, would rise by 7 euros a month as a result in the increase in Euribor, assuming a 20-year repayment term and a spread for the loan of 50 basis points over Euribor.

Euribor may rise to 2 percent over the course of next year, said David Cano, a partner at Analistas Financieros Internacionales, a Madrid-based economic consultancy firm in a phone interview. At 2 percent, mortgage repayments would increase by about 50 euros a month, according to a simulation calculator on the website of the Spanish mortgage association.

“In macro-economic terms the impact probably is not going to be significant,” said Cano. “The risk is that it has a psychological effect.”

After reaching a record high of 5.39 percent in July 2008, the Euribor rate plunged to 1.22 percent in March this year.

Construction Boom

Spanish mortgage lending soared during Spain’s construction boom, surging more than fivefold from 1999 to 626 billion euros at the end of March this year, according to central bank data.

As much as 87 percent of new Spanish mortgages are floating-rate, meaning they reset according to increases or declines in benchmark interest rates.

In the U.K., the proportion is 54 percent, according to the European Mortgage Federation. While mortgage loans classed as “dubious” fell to 2.7 percent of total home financing in March, from 2.9 percent in December, that remain seven times higher than levels at the end of 2005, according to data from the Spanish mortgage association.

Higher rates come as government austerity measures and the withdrawal of public works programs threaten to undermine Spain’s economic recovery. The International Monetary Fund predicts a 0.4 percent contraction in the Spanish economy this year, after shrinking 3.6 percent in 2009.

While rates will climb, the increases shouldn’t be too “frightening,” said Raj Badiani, an economist at IHS Global Insight in London.

“You can’t expect Euribor to stay at the current low levels for ever and what really matters now is the rate of ascent,” said Badiani. “The last thing Spain needs now is Euribor rising rapidly over the next year.”

To contact the reporter on this story: Charles Penty at cpenty@bloomberg.net

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