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Date Published: 13/12/2024

Bank cuts interest rates and mortgage repayments in Spain drop by 100 euros a month

The European Central Bank has dropped the interest rate to 3% following a third consecutive cut

The European Central Bank has dropped the interest rate for a third consecutive time this year. The interest rate is now at 3% and the institution is expected to continue this downward trend into 2025.

The major change that comes from the decrease in interest rates is the price of repayments to mortgages and loans in Spain and elsewhere. When the European bank lowers interest rates, the price of loans falls as the financial institutions adapt their commercial offering.

Mortgages occupy a large space of intrigue when interest rates drop. In recent months, the interest rate on new home loans has gone from close to 4% to currently around 3.2%. And this other drop in rates, together with those that are expected to come next year, will cause the downward trend to continue in 2025.

Moreover, new fixed-rate mortgages will also see a downward adjustment as interest rates are looking to fall to between 2% and 2.25% during the first half of next year.

Furthermore, people actually paying mortgages at this moment in time will also feel some relief in the interest price drop. The reference rate for the mortgages will now sit at 2.4%, when just a year ago the same mortgages were at around 3.6%.

Therefore, the difference from this year to the next is particularly noticeable in the payments of mortgages. The average mortgage is around 150,000 euros and over 25 years a single 1% differential in rates can lead to as much as 100 euros difference a month for the average repayment.

It makes the current price of repayment around 743 euros a month if the interest rates stay the same as it has now been set.

Beyond loans, deposits are also affected by the ECB's interest rate cuts. In this case, when the price of money falls, what banks pay for their clients' savings also falls.

For many conservative savers, fixed-term deposits will continue to be a great option. However, the banks are adjusting the APRs of their deposits downward following the central bank's monetary policy. As the ECB continues to reduce interest rates, these products therefore will see a significant decline in attractiveness.

Furthermore, savings accounts are leaving behind the golden age of high returns, but they are still an interesting option for those looking to make their savings profitable with low risk. Today, some entities offer returns of between 3% and 3.30% APR

Therefore, with interest rates falling throughout Spain, mortgage repayments will witness some relief. However, for those with saving accounts, returns will begin to see a decline.

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