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The tightening of loans, the monthly installments of families that have taken home loans have increased by nearly 47%

2022-12-04 10:31:30Biznes SHKRUAR NGA REDAKSIA VOX

The tightening of loans, the monthly installments of families that have taken

Those who pay the bill for rapidly rising interest rates the fastest are borrowers. The increase in bond yields is automatically transmitted to the interest rates of loans with variable interest in lek.

The most used indicator as a benchmark (reference rate) is the yield of 12-month Treasury Bonds, to which a fixed interest margin is added. The total interest rate of the loan is revised with a frequency defined in the contract, at least once a year, to reflect the performance of bond yields.

In mid-November 2021, the yield of 12-month Bonds in the primary market was at the level of 1.71%. Adding a fixed interest margin of 2.5%, the total interest rate for a variable rate mortgage a year ago was approximately 4.21%. Currently, the 12-month bond yield has reached 5.83%. Adding the fixed interest margin, the total loan interest amounts to approximately 8.33%.

A family that bought a property worth approximately 13 million ALL (calculated for a property with an area of ​​100 m² and an average price of 1100 euros m²) and financed 70% of the purchase with a bank loan can be considered to have received a loan of approximately ALL 9.1 million.

For a repayment term of 25 years, a year ago, with an interest rate of 4.21%, this family paid a loan installment of approximately 49,100 thousand lek per month.

If this family were to review the interest today, with current Bond yields, it would pay a total annual interest of 8.33%, which would translate into a monthly installment of about 72,200 ALL. Compared to a year ago, the loan installment increased by ALL 23,100, or over 47%.

According to the latest INSTAT estimates (of 2020), an Albanian family has an average monthly spending budget of 84,500 ALL. The added expense for interests in a value of 23,100 ALL constitutes more than 27% of the average monthly budget of an Albanian family.

Under these conditions, the household will either consume less, or save less, to meet the additional expenses.

At the end of September, the portfolio of medium and long-term loans in ALL reached 272 billion ALL. In general, these loans are offered with variable interest rates, excluding a part of the segment of consumer loans for individuals.

An annual increase of 4.21 percentage points in interest rates on this portfolio amount translates into about 11.5 billion ALL more interest expenses per year. This money will be deducted from the savings or consumption budget of the families, negatively affecting the domestic demand.

The increase in interest rates in the financial market is beginning to be reflected in the price of new loans in Lek. Bank of Albania data show that in September, the average interest rate for new loans in Lek reached 7.07%, the highest level since February 2018.

Currently, the average interest rate of new loans in Lek has increased by 1.18 percentage points compared to a year ago and by 1.6 percentage points compared to March of this year, when the Bank of Albania started monetary normalization.

The growth has started to take on stable features, especially after the month of July, and the average interest on new loans is increasing for the third month in a row.

A similar trend is being observed for Euro loans. A year ago, the reference indicator, the 12-month Euribor, was at negative levels and counted as zero in determining the interest of loans built on it.

Adding a margin of 4% (for the Euro the fixed margins are higher because the Euribor has been at very low levels), a year ago the total interest on a variable interest loan in Euro was approximately 4%. Currently, Euribor has reached the level of 2.85%, which would bring the total loan interest to 6.85%.

For a loan worth 77 thousand euros and with a maturity of 25 years, a year ago, the installment could be calculated at 406 euros, while with today's Euribor rate, the loan installment would reach 537 euros.

Compared to a year ago, the value of the installment would increase by 131 euros, or approximately 32%. For the Euro, the increase in reference rates is smaller compared to the Lek, but nevertheless the increase in interest expenses is visible.

The data of the Bank of Albania show that at the end of September, the portfolio of medium and long-term loans in foreign currency (the overwhelming part in Euros) was about ALL 255 billion. An annual increase in the interest rate equal to the increase in the 12-month euribor, 2.85%, increases the value of annual interests on this amount by 7.3 billion ALL.

In total, the approximate impact of the growth of the reference indicators so far on the interest expenses of the borrowers can be estimated at around 160 million euros per year.

Will the property market "cool down"?

In a normal economy, rising interest rates have a direct effect on the real estate market. As loans become more expensive and less affordable, the demand for properties decreases and so do their prices.

In Albania, often the trends of the property market are not easy to explain with the underlying economic factors. One of the main reasons is believed to be the high role of income from informal and criminal sources, which are channeled into the real estate market.

However, the increase in interest rates will hardly pass without consequences in the real estate market in Albania.

In recent years, credit for the purchase of real estate has grown rapidly and has been one of the main pillars of support for the real estate market. Last year, new credit for the purchase of real estate by individuals reached the value of 39.8 billion lek, or about 330 million euros, the highest level ever recorded.

This record looks set to be broken again this year. By the end of the 9th month, the new home loan reached ALL 35.4 billion, increasing by 23% compared to the same period a year ago. The total value of the portfolio, at the end of September, reached 163 billion ALL, or approximately 1.4 billion euros, with an annual increase of 16%.

These figures prove that bank credit definitely has a significant role in financing real estate purchases. Rising interest rates are expected to slow lending next year, affecting an important segment of demand.

Also for this reason, real estate market agents believe that price growth in the coming years will be much slower compared to recent years.

According to the Fischer Index of House Prices, calculated by the Bank of Albania, the average price of houses sold during the 6 months of 2022 has increased by 39% compared to a year ago.

This is the strongest increase in the index since 2013, when the Bank of Albania started its calculation. Compared to the base period, the housing price index has increased by approximately 110%.

Last year, the construction and real estate sectors were among the main contributors to economic growth. The construction sector grew by an average of 19.7%, while the real estate sector grew by 9.3%./monitor

 


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