Banks May End Up Paying Out Interest To Their Mortgage Customers

15 April 2015 – Expansión

In Europe, negative interest rates have created a problem that no bank would ever have imagined until now: they cannot rule out the possibility that they may end up having to pay out interest to customers that have mortgages linked to Euribor.

In countries such as Spain, Portugal and Italy, Euribor is the interbank interest rate that is used for (most) loans. Since the ECB introduced measures such as quantitative easing (QE) to boost the Eurozone’s economy, the index has fallen sharply and has even slipped into negative territory.

Given that the banks set interest rates on many of their loans at a small percentage above or below reference rates, such as Euribor, the fall in these interest rates means that some banks are now finding themselves in the difficult situation in which they are having to pay out interest to borrowers.

At least one bank, Bankinter, has started to pay its clients interest on their mortgages for those loans that are indexed to the Swiss franc, after the reference rate fell into negative territory.

According to a spokesman for Bankinter, in recent months, a negative interest rate has applied to the handful of mortgages linked to one-month Swiss franc Libor that the bank still has in its portfolio, since that Libor rate has dropped to a rate of -0.85%.

So far, European banks have been hoping that they will avoid the cost of having to pay out interest to their customers.

They have consulted with their (respective) central banks to find out how they should act in the event that the interest rates on their mortgages fall into negative territory. And so far, the response they have received has not been very reassuring.

The Portuguese central bank ruled recently that entities will have to pay interest to their customers if Euribor falls below zero, although the banks may “take appropriate action” regarding the terms (and conditions) they include in future loans. In Portugal, more than 90% of mortgages are linked to Euribor.

In Spain, a spokesman for the Bank of Spain said that this matter is currently being evaluated. The vast majority of Spanish mortgages are linked to 12-month Euribor, which currently amounts to 0.187%.

An executive from another Spanish bank said that in recent months his entity had started to include floor clauses in the loans linked to Euribor that it grants to companies.

In Italy, the banks are waiting for a response from the central bank, although in advance, they say that their mortgages do not contain any clauses to explain what happens if interest rates slide into negative territory.

Original story: Expansión (by P. Kowsmann and J. Neumann)

Translation: Carmel Drake