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Homeowners across the euro area will feel the impact of rising mortgage costs well into the next decade despite decreasing interest rates, according to a warning from the European Central Bank.
A blog post by ECB staff on Wednesday highlighted that many borrowers who secured home loans during the period of low and negative interest rates will need to refinance in the coming years, leading to a strain on household budgets and a potential drag on consumption that could extend until 2030.
Following a surge in inflation in late 2021, the ECB swiftly moved to normalize interest rates in 2022, raising borrowing costs from -0.5 per cent to 4 per cent in just 15 months. Despite recent rate cuts, the average mortgage rate is expected to continue climbing for the foreseeable future, as per the ECB’s analysis.
While the ECB has reduced its key deposit facility rate multiple times since mid-2024, with further cuts anticipated, the structure of the European mortgage market means that the benefits of these reductions will be delayed for most homeowners. The majority of property buyers in the euro area have fixed borrowing costs for several years, with many loans issued during the low rate period set to adjust to higher rates in the coming years.
Additionally, the survey conducted by the ECB on consumer expectations indicated that a significant portion of homeowners in the euro area have already cut back on spending or savings in response to or in anticipation of higher interest payments. This trend is expected to continue over the next year, impacting consumption levels in the region.