Since last summer, households have seen a sharp rise in electricity and gas prices, which in turn has led to a historic rise in inflation in many of the products that are normally consumed. This is likely to be compounded by rising interest rates, which will make it more expensive for millions of families who have taken out mortgages to buy a home, ending a six-year break in Euribor negatively. INE confirmed 9.8% inflation this Wednesday in March, the highest since 1985.
The situation is in a difficult context for many households, especially those with low incomes who are most affected by high inflation, known as the poor tax. However, the current situation is very different from the 2008 financial crisis. Last Tuesday, the Bank of Spain said that the financial wealth of households – the difference between their savings and debt – increased by 9.4% in 2021. And is on a pre-pandemic level. This is fundamentally due to the large savings pads that many families had during the corovirus crisis.
Now families must make decisions in the face of a period of high inflation and try to protect themselves as much as possible from its consequences. Of course, not all people are in the same situation, but experts point out some general aspects that can be taken into account.
What to do with the mortgage?
Spain is a country where housing is highly used as property, despite rising rental prices. For this reason, rising inflation, leading to rising mortgage interest rates, has a clear impact on the household economy. Although banks have made it a priority to sell these loans at a fixed rate in recent years, it is estimated that about three-quarters of household debt is at a variable rate. Euribor touched positive ground for the first time this week in more than six years, confirming analysts’ forecasts.
“Eurobor will definitely increase and mortgages will be more expensive,” said Raymond Torres, Funcas’ director of the situation, who believes that in a period like the current one, families with variable rate loans should try to get one. Constant type transmission. “In some cases, the cost of this operation is very low,” he says.
Another option suggested by Torres and shared by other experts is to pay off part of this debt. “If you have liquidity,” explains Antonio Pedrazza, a member of the General Council of Economists. “Liquidity is useless now, inflation is spoiling it,” said the economist, noting that savings they have lost in purchasing power as prices rise and allocating them to cover mortgages may be a good option.
And with new loans?
The mortgage market had its best year in 2021 for more than a decade, and it looks like early 2022 data are being maintained. In the weeks leading up to the Ukraine crisis, the bank offered a fixed rate increase in prices. However, experts advise you to pay attention to this and not get carried away with new offers. “When a bank encourages and does everything it can to attract a client at a variable rate, it is a transfer of risk to it,” said Torres, who advises looking for a fixed mortgage.
“While fixed mortgages are becoming more expensive, it’s a good time to strengthen and mitigate risks,” adds the Funcas economist, who acknowledges that “at first glance it may seem expensive,” but notes that future evolution “will be more pronounced.” In mortgages. Pedraza agrees with this opinion, emphasizing that it is better to “attach a low fixed rate” when concluding a new mortgage. Both add two details. The first is that if you choose a Euribor-related loan, you have the flexibility to transfer it at a fixed rate in the future. Second, monitoring opening costs.
How to use the savings?
According to the Bank of Spain, households ended last year with financial assets of almost € 2.7 trillion (cash, deposits, shares or mutual funds), 7% more than in 2020. As with everything, these are global highlights and many families live there. The situation is very different, however the data serve to match the savings accumulated by Spanish households. In times of high inflation, economists remind us that deposits, a major savings reserve, are losing their purchasing power. Currently banks do not repay this money and if prices rise, you can buy less with it.
Torres suggests that one option is to use part of this savings, if you have the economic ability, to invest it in government debt bonds. “It is a very liquid market and it can be sold,” said the economist, who suggested that “risk diversification” was needed. For people who have a high appetite for risk, consider the investment funds offered by banks or investing in raw materials. Pedraza is more skeptical about bonds and their future profitability. “The only alternative is to take risks,” he notes, and encourages the search for other investments that can bring in more revenue.
The Funcas economist adds nuances. Not all prices increase the same and deposits on these products do not lose value equally. It points to, for example, housing that is not growing as well as CPI, or some services, such as education, where prices are not moving in the same direction. That is, if the savings are reserved for these goods and services, the value loss is less.
Are pre-planned purchases advisable?
This is a recurring question in times of high inflation and when it is expected to increase and be related to the above. If the savings could lose value and prices rise again, it is better to postpone the planned purchase now than to postpone it for a few months. “Consuming long-term goods is a way to maintain the value of your savings,” Torres said. This includes issues such as equipment, car or home repair. Regarding the latter, he argues that it is to use the savings in one’s own home in a way that “improves its market value, its use, and the well-being of the family.”
Pedraza, from the Council of Economists, notes that this search in anticipation of rising prices for procurement is something that is already being observed in the housing market. People who were going to buy a house and expected the price to be higher – both in terms of price and interest, decided to go ahead. This economist is more in favor of these decisions than buying long-term goods or advancing cars.
In any case, both agree to make purchases in advance, yes, but only if necessary. “It should be advanced if they are a matter of necessity and not false or speculative,” Torres said. “If you do not need to buy, it is not advisable to do so now,” said Pedrazza.
What to do with consumption?
One issue that has been in vogue in recent weeks has been the accumulation of supplies during shopping at the supermarket, which coincided with delivery problems due to a truck strike last month. Torres points out that the accumulation of perishable goods is common in countries with rising inflation, such as Argentina. “People have developed it a lot and there is no economy. “It is either made in foreign currency, or it collects and stores products that can be priced,” he said. However, he warns that “although it may make sense” if this is what everyone is doing at the same time, “it is raising prices and destabilizing the economy.”
This economist offers to find a fixed price in all supply contracts (electricity, gas, internet, telephone, etc.), which gives a forecast of how much will be spent at the end of the month and to avoid surprises. It also increases, if possible, “adapting consumption to what is happening”: for example, using a car only when needed to reduce fuel costs. “In general, discipline is important when it comes to purchasing for low-budget families. The problem with inflation is that people may not understand when it is done and notice it at the end of the month,” he said. For this reason, he advises “look at the price and where to buy.” “We are not interested in prices approaching zero near zero,” he added.
Pedrazza acknowledges that there is a part of consumption that is “inevitable” in relation to food. However, beyond that, he calls on families to eliminate “extra” expenses, “to remove expenses that come in every month and are not needed.” And it points to it as the key to reviewing credit card costs and Rotating. Many families are “chained to these loans, which have a very high interest rate. If you have liquidity, this is the first debt that needs to be repaid,” he concludes.
Source: El Diario
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