Why Does Spain Have the Cheapest Mortgages in Europe?

According to the European Central Bank, Spaniards currently have access to some of the cheapest mortgages in Europe. Economist José Carlos Díez, Professor of Economics at the University of Alcalá, analyses the key factors behind this and explains why today’s mortgage market is more resilient and competitive than it was in 2007.

The story behind why Spain has developed Europe’s most competitive mortgage market is both fascinating and little known. Spain’s Mortgage Law was passed in 1946 and revised in 1981, creating a legal framework and a high degree of legal certainty that help explain today’s market.

I first heard this story from my professor at the University of Alcalá, Antonio Torrero, who became Chairman of Banco Hipotecario in 1983. Banco Hipotecario was a state-owned bank that he modernised and that played an important role in developing Spain’s mortgage market. These were difficult times, marked by a severe inflation crisis and mortgage rates above 20%. One of the first measures taken by Felipe González’s first government was to approve a stabilisation plan, devaluing the peseta and pursuing a contractionary fiscal policy to bring inflation down.

The first “Mortgage War” was launched by Banco Santander in the 1990s, when it introduced a fixed-rate mortgage at 9.5%. Inflation had already fallen below 5%, but Spain still had the peseta, interest rates remained very high and mortgage repayment periods were typically around 15 years. In 1999, Spain joined the euro, and Spaniards enjoyed a stable currency and low interest rates for the first time in centuries. This has been a decisive factor in explaining why Spain has such a competitive mortgage market today.

Although the number of banks has fallen significantly since 2008, competitive pressure in the mortgage market remains intense. With Euribor above 3% and yields on long-term Spanish government debt close to 3.85%, it is now common in Spain to obtain a 30-year fixed-rate mortgage at below 3%. According to the Bank of Spain’s recently published Annual Report, we are currently experiencing one of the most favourable periods in terms of access to mortgage credit.

However, today’s market bears little resemblance to that of 2007. Back then, the vast majority of mortgages were issued at variable rates, whereas today more than 90% of new mortgages are fixed-rate. This gives borrowers a degree of long-term protection against fluctuations in interest rates.

There has also been a dramatic change in the housing market itself. In 2007, around 650,000 homes were completed, creating an oversupply. Today, only around 100,000 homes are completed each year, and there is a housing shortage—which is also reflected in the mortgage market. Most residential property transactions today involve existing homes, and some buyers sell their previous property, which has appreciated in value, meaning that some do not need to take out a mortgage at all. In 2007, around 60% of home purchases were financed with a mortgage; today, the figure is slightly below half.

Another significant change concerns access to housing for young people. In 2007, one in four mortgages was taken out by someone under the age of 30; today, it is only one in ten. The problem, particularly in cities where house prices have risen the most, is that young people struggle to save the 20% deposit needed when a mortgage finances 80% of the purchase price, as required by regulation. The government has introduced public guarantees to help finance this initial 20% contribution, but this is not enough. The biggest obstacle to housing affordability for young people has been the collapse in the construction of subsidised housing. In 2007, more than 100,000 such homes were built each year; today, the figure is close to 10,000. These homes offer more affordable prices or payment arrangements, whether for purchase or rental.

Another radical change has been the level of household debt. The repayment of mortgage principal increases as a loan approaches maturity and is also higher when interest rates are low. In 2010, Spanish household debt stood at 85% of GDP; today, it is close to 40%. Mortgages taken out before 2007 are now, almost twenty years later, largely repaid. Moreover, for many years Euribor was negative as a result of the ECB’s monetary policy, which meant that a very large share of households’ monthly mortgage payments went towards repaying principal.

Those negative interest rates ultimately contributed to inflation and, in Spain’s case, housing has become one of the main sources of inflationary pressure. Today, interest rates are at more normal levels, closer to inflation, which should help contain price increases, including house prices. The reduction in household debt is also crucial to understanding why Spain has some of the lowest mortgage rates in Europe. Spanish banks now hold more customer deposits than they have outstanding loans. This intensifies competition to issue mortgages and put that surplus of savings to work, exerting downward pressure on mortgage rates.

Conclusion: Spain has a housing crisis, but the mortgage market is not the cause. Spain’s mortgage market is far more robust than it was in 2007, with lower household debt and lending funded by domestic deposits. This helps explain why mortgage interest rates in Spain can be lower than both Euribor and long-term Spanish government bond yields.