For how long can bank loan borrowers keep paying rising installments?

The big question in every bank loan borrower’s mind is whether they will be able to keep paying constantly rising instalments, Philenews reports.

Especially, since the European Central Bank has made clear they will stay the course in raising interest rates significantly at a steady pace.

Because they want to keep them at levels that are sufficiently restrictive to ensure a timely return of inflation to its 2% medium-term target.

Understandably, however, anxiety is mounting over mortgage payments especially since – despite ECB’s aggressive policy – inflation shows no sign of abating.

The ECB has raised interest rates by 3 percentage points since July and has already announced a 50-basis point (half a percentage point) rate hike at their upcoming March 16 board meeting. Thus, markets now are expecting over 75-bp hikes before the end of the summer.

This effectively means that before the ECB started the rate hikes the average mortgage rate was 2.5% and maximized at 3%. So, if someone had a balance of €200,000 and a repayment term of 20 years their instalment was €1,060.

Now the interest rate is 5.5% to 5.75% which means that the instalment has increased to €1,405 which means an additional charge of €345 per month.

And on March 16 – when the ECB is expected to raise interest rates by 0.50% – the total charge is expected to reach 6% to 6.30% which means an instalment of €1,469.

That is, this example points out that as from this summer the borrower will be charged an additional over €400.

This is the optimistic scenario as well, because it only involves one loan. There are households or businesses that have more than one loan, for example a consumer loan, which is also burdened by the increases and the problem is multiplied.

Essentially, for an average household the salary covers loan obligations to the banks and the remaining towards fixed costs and other obligations.

In any case, the 3% rate at which interest rates now stand is the highest recorded in the euro area since 2008. And, in March,  this record will also be broken.