Growth rates in housing loans are steadily increasing in the euro area
Euro area households are continuing to borrow more to buy housing. The total outstanding amount of money borrowed from banks by euro area households for house purchase stood at €4.6 trillion in February 2020, which is approximately 40% of the euro area’s gross domestic product (GDP).
While bank interest rates on loans for house purchase have decreased throughout the euro area, there are different national practices regarding whether household mortgages are tied to fixed or variable rates. In February 2020, around 98% of new loans to Finnish households were at variable rates, whereas for French and Slovak households, less than 2% and 1.5%, respectively, of new loans were at variable rates.
The annual growth rate of loans to households has followed a positive trend over the last five years and stood at 3.8% in February 2020 (see Chart 1).
Chart 1. Annual growth rate of loans to households (percentages)
Notes: Euro area, adjusted series. Housing loans account for approximately 74% of total adjusted loans (minimum 71%; maximum 76%).
The rising demand for loans among households was supported by low interest rates (see Chart 2). In the euro area, average interest rates on new loans for house purchase fell from approximately 3.6% in February 2010 to 1.41% in February 2020. However, a closer look at country-level data reveals a broad variation in interest rate levels within the euro area, ranging from 0.77% in Finland to around 2.88% in Ireland in February 2020. These differences may reflect different national financial structures, household preferences (on the demand side) and supply-side factors.
You can compare average rates across euro area countries using Chart 2.
Chart 2. Bank interest rates on new loans for house purchase (all maturities) (percentages per annum)
For instance, differences in interest rate levels between euro area countries can partly be explained by different national practices in the use of variable and fixed rates (see Chart 3). In the euro area, the share of housing loans with variable rates was approximately 15% on average in February 2020, ranging from 1.5% and 2% in Slovakia in France, respectively, to 94% to 98% in Finland, Lithuania and Latvia.
The share of housing loans tied to variable rates in total loans granted is a meaningful indicator of how changes in interest rate levels may affect households. Loans tied to variable rates allow changes in official interest rates to be transmitted directly to households’ loan obligations. In contrast, contracts tied to fixed rates over a certain period of time serve as insurance against potential future increases in official interest rates by the European Central Bank.
Chart 3. Share of variable rate loans by country (percentages)
Bank interest rates are one of several indicators used to assess the impact of monetary policy on the economy. They provide valuable information for analysing and assessing the transmission mechanism of monetary policy and the extent and speed of the pass-through of official interest rates, via market rates, to the lending and deposit rates offered to households and corporations.
Statistics on bank interest rates can be used to track both interest rate developments and associated business volumes. Combining interest rate levels and lending and borrowing volumes provides insights into developments in the banking and financial system.
Bank interest rate statistics refer to interest rates individually contracted between banks and their customers on loan and deposit agreements. In the case of loans, they reflect the amount charged by a bank to a borrower and can differ depending on various factors, such as the amount and duration of the loan, the security provided, the creditworthiness and sector of the borrower, the purpose of the loan and levels of competition in the retail banking sector. Bank interest rate statistics are calculated on new business and outstanding amounts converted to an annual basis and quoted in percentages per annum.
Bank interest rate statistics adhere to the same concepts, methodology and calculation methods across all 19 euro area countries and are therefore highly comparable across countries.
In line with international standards (European System of Accounts, ESA 2010), Regulation ECB/2013/33 concerning the balance sheet of the monetary financial institutions (MFI) sector, defines loans as “holdings of financial assets created when creditors lend funds to debtors, which are not evidenced by documents or are evidenced by non-negotiable documents”. Non-negotiability exists when ownership of a financial claim is not readily capable of being transferred. Loans also include assets in the form of deposits placed by reporting agents.
In MFI balance sheet statistics, loans to households can be broken down by purpose, such as loans for consumption (e.g. car loans), loans for house purchase and other loans (e.g. student loans).
In MFI balance sheet statistics, “lending for house purchase” refers to loans granted for the purpose of investing in housing for own use or rental, including construction and refurbishment, or for the purchase of land. Loans included in this category are those secured on residential property that are used for house purchase and other loans for house purchase made on a personal basis or secured against other assets. The category also includes (without being separately identified) housing loans to sole proprietors or unincorporated partnerships without legal status if the housing is predominantly used for personal accommodation.
The ECB uses the adjusted total loans to household series as the headline series for credit developments, since it provides a better view of lending to the real economy by euro area MFIs. The adjusted series includes an adjustment for sales and securitisations of loans removed from the balance sheet and for the impact of notional cash pooling positions resulting from cash management services provided by certain banks to corporate groups.
More information on loans in the context of MFI balance sheet statistics can be found in the Manual on MFI balance sheet statistics, in particular in Section 4.3 on loans and Section 7.4 on adjusted loans.
New business is defined as any new agreement between a household and a bank. New agreements comprise all financial contracts whose terms and conditions specify the interest rate on the loan for the first time and all renegotiations of existing loans. Prolongations of existing loan contracts which are carried out automatically, i.e. without any active involvement of the household, and which do not involve any renegotiation of the terms and conditions of the contract, including the interest rate, are not regarded as new business.
Outstanding amounts are defined as the stock of all loans granted by banks to households.
A fixed interest rate is set up for a specific period of time, which can be the entire duration of the loan. This fixed rate means that you pay the same monthly instalment on the mortgage, regardless of the economic conditions present in the market. If interest rates go up, it doesn’t affect your monthly payment. However, if interest rates go down, you don’t get the benefit of that either.
A variable interest rate “floats” against a benchmark, such as a money market rate (e.g. the 12-month euro interbank offered rate).
In ECB statistics, the “initial period of fixation of the interest rate” is a statistical term applied to lending rates on new business and is defined as a predetermined period at the start of the contract during which the interest rate will not change (e.g. three months or one year). With a variable rate, regular repayments may fluctuate following the initial period of fixation, depending on general interest rate developments. By taking out a variable rate mortgage, you might benefit from a future decrease in interest rates, reducing your regular repayments, or you might face an increase in the interest rate and therefore an increase in your regular repayments on the mortgage when compared to a fixed rate loan.
In ECB balance sheet statistics, growth rates are calculated on the basis of transactions rather than by simply comparing end-of-period outstanding amounts. By excluding non-transaction-related changes, these growth rates should represent developments in outstanding amounts resulting from transactions alone. For more information on the calculation of the indices of notional stocks and growth rates, see Section 7.3 of the Manual on MFI balance sheet statistics.
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