The impact of rising interest rates and inflation on households

Those who are paying off a mortgage feel the challenging times ahead the most, with interest rates skyrocketing and, with them, the instalments on their home.
Articles 27/02/2023

The rise in interest rates is, more than ever, harming the economy of Portuguese families. The sharp rise in inflation is affecting the lives of Portuguese people in general. However, those who are paying off a mortgage are feeling the hardest of times ahead as interest rates are skyrocketing and the repayments on their homes are.

However, we must remember that since the mid-1990s, inflation rates have been low because of the countries’ preparatory measures for the launch of the euro and the European Central Bank’s monetary policy.

Only recently have inflation rates registered significant increases, mainly due to the sharp rise in energy and food prices?

Even if the reason is known, the truth is that many Portuguese will soon have to make difficult choices to maintain a decent standard of living due to rising interest rates on variable-rate mortgages, which represent about 90% of all mortgages in force. Moreover, statistics point to an increase of about 54% in variable-rate mortgages, even during February.

Instalments have been increasing systematically in recent months, sometimes doubling or even tripling. All this is because the 3, 6 and 12-month Euribor rates have risen significantly. If a year ago they were negative, the rates are now fixed between 2.37% and already more than 3.5%, the highest in recent years, and the tendency to rise remain.

This trend is already leading families to look for alternative housing.

Alternatives to face the rising interest rates

Some families are opting to change their residence to a cheaper one, thus managing to reduce their effort rate on their mortgage loans. In addition, some of these families take the opportunity to change their area of residence and move, in many cases, to more peripheral regions, thus escaping the inflated prices of the big cities.

In the last few weeks, many have shared that Lisbon has lost about 7,000 (seven thousand) inhabitants due to increased housing prices. As a result, Lisboners have been moving to municipalities such as Torres Vedras, Mafra or even Arruda dos Vinho, to the detriment of Lisbon’s housing, much to blame for the high housing prices, which are gradually becoming unsustainable for Portuguese families’ wallets.

Renegotiating housing credit is also an alternative that allows one to avoid exchanging homes.

To fight the effects of inflation, the government has approved three essential measures expected to be in effect until the end of 2023. Among these measures are new rules for renegotiating housing loans, early repayment of loans at no cost to the customer, and deductions in the IRS withholding tax for those paying housing loans.

In short, any credit financial institution will be obliged to implement these rules, and adverse reports to the Bank of Portugal will not be allowed in case of renegotiation.

According to data from the Bank of Portugal, in December 2022, credit restructurings amounted to around 22%, a much higher figure than the previous year.

Also, in the measures indicated, we must highlight that, despite being allowed to workers who have mortgages to apply for a reduction of the withholding tax to which they are subject, the truth is that the measure has had little adherence because the Portuguese little know it.

What are the perspectives for 2023?

In 2023 the inflation outlook is for a brief relief. However, this does not mean that there will be a slowdown in the rise of interest rates. On this matter, it is premature to conclude.

What is certain is that last December, the European Central Bank held its monetary policy meeting, where it decided to raise interest rates again for the fourth time in a row. Christine Lagarde (president of the ECB) has already warned that this will not be the last rise and that interest rates will still have to rise significantly until the moment of rupture, which, she says, is still far from happening.

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