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MONEY

How will rising interest rates affect my life in Spain?

The ECB's decision to raise interest rates in a bid to soften the blow of inflation will have negative consequences for some and a positive effect for others. Here's how it will affect those with loans, mortgages and savings in Spain.

spain interest rates
The increasing costs of loans and mortgage payments comes at a time the Spanish economy is facing a perfect storm of financial pressures. (Photo by CESAR MANSO / AFP)

The European Central Bank’s (ECB) Governing Council raised interest rates on Thursday for the first time in 11 years, with further increases likely in the coming months.

The ECB has raised its interest rates by half a percentage point, to 0.50 percent, to try and slow inflation in the broader Euro area, which in June jumped to 8.6 percent.

The increase represents the biggest increase in 22 years.

In Spain, inflationary pressures are being felt even more severely, reaching record levels.

READ ALSO: Rate of inflation in Spain reaches highest level in 37 years

Why have interest rates been raised?

When prices are increasing too quickly – in other words, when inflation is too high – putting up interest rates is one way to try and slow it down and get the rate back down to the ECB’s 2 percent target rate. 

The theory – and hope for consumers – is that this reduces the prices of products and services in the short term, although Christine Lagarde, President of the ECB, said this week that war in Ukraine likely means that inflation “will remain at an undesirably high level for some time,” and warned that “the economic horizon is darkening” across the Eurozone. 

“Food and energy will continue to be higher than expected,” the president added.

How does it affect life in Spain?

For those of you living in Spain, the main effect of increasing interest rates is on loans, mortgages, and savings, something many foreigners living in Spain rely on.

The impact can be positive or negative, depending on your financial situation.

If you have substantial savings, you could make more money on that lump sum as your savings will become more profitable, particularly if interests rise again.

On the other hand, if you are looking for a loan or credit, or repaying debts or mortgages, doing so could become much more expensive. 

READ ALSO: The products that are more expensive than ever in Spain

Simply put, an increase in interest rates makes loans more expensive – not only at the consumer level but for national governments and banks, too – and it also directly affects mortgage applications and those applying for credit, as well as people who pay a variable rate mortgage based on the Euribor.

Fixed rate mortgages, experts say, are more insulated to interest rate rises.

For many years in Spain, the vast majority of new mortgages signed (as much as 95 percent of them) were variable rate and thus vulnerable to changes in interest rate payments

But that trend has reversed in recent years, with around 80 percent of Spanish mortgages now being fixed rate agreements better protected against increased interest rate repayments.

The Euribor is a measure of the average rate of interest rates that banks lend to one another across the Eurozone and used, in effect, as a reference for mortgages. 

This measure has also jumped up in recent months and is now close to 1 percent, and experts forecast that it will see out 2022 at around 1.5 percent this year and that it could surpass 2 percent in 2023. 

These increases in the Euribor rate can have a big impact on consumers and families. For example, the repayments on a standard variable interest rate mortgage loan (a €150,000 loan to be repaid over 15 years, for example) could shoot up by more than €150 per month.

Impact on living costs in Spain

The ECB’s interest rate rises come at a time when Spanish consumers are facing dire economic circumstances, crippled by skyrocketing inflation, utilities bills and increasings goods prices.

According to a survey published by Banco de España this week, the percentage of Spanish families that are forced to use more than 40 percent of their gross income to make debt repayments could rise to about 15 percent as a result of the interest rate rises.

According to the report, the proportion of households with this level of financial vulnerability was just 11 percent in 2020 and 10 percent in 2017.

The increase in debt-strapped consumers was concentrated in the lowest-income households, which jumped from 9.5 percent to 15.1 percent, and those where the main breadwinner in the household was under 35 years of age, which went from 4.4 percent to 6.8 percent, and among the unemployed, which almost doubled and went from 4.9 percent to 8.7 percent. 

The increasing costs of loans and mortgage payments comes at a time the Spanish economy is facing a perfect storm of financial pressures. 

The economic shutdown during the Covid-19 pandemic, which included heavy job losses, combined with rising utilities bills, food prices and rampant inflation – partly caused by war in Ukraine – means that at the very time when many Spaniards might consider taking out a loan to help them survive these pressures, doing so has become more expensive.

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For members

ELECTRICITY

The cheapest rates Spain’s electricity companies don’t want you to know about

Finding a cheaper tariff is one of the best ways to counteract skyrocketing electricity bills, but a leading consumer watchdog has warned Spain’s electricity providers are not always open to telling customers about the best deal they can get.

The cheapest rates Spain's electricity companies don't want you to know about

Like in many parts of the world, inflation triggered by the war in Ukraine has made the energy market incredibly volatile and sent household electricity bills soaring in Spain. The average bill reached €158 in August, an eye-watering increase of over 60 percent compared to 2021.

To give you some idea of just how much prices have risen in Spain, in August of 2020 the average electricity bill was €64, in 2021 it was €93, and in August 2022 €158.

According to recent figures from Eurostat, electricity bills in Spain have risen eight times more than in France and four times more than in Germany. Whereas the average Spanish household paid 60 percent more in August compared to 2021, in France it rose by just 7.7 percent and in Germany 16.6 percent.

The Spanish government has tried various methods to ease the burden on households. In June the tax (IVA) on electricity bills was cut from 21 percent to 10 percent, and then it was quickly reduced again from 10 percent to 5. The European Commission agreed to cap gas used for power generation at €40 per megawatt-hour known as the ‘Iberian Exception’, with the price limit projected to average out at €50 over the coming 12 months.

READ MORE: Spain to cut electricity tax by half to ease inflation pain 

The Spanish government predicted the measure — which will be in effect until May 31st 2023 — would lead to a reduction in household energy prices of up to 20 percent, yet it has done little to limit the rise of electricity bills so far.

READ MORE:

Unsurprisingly, many Spaniards are now seeking ways to cut down on their bills, whether it be by using the washing machine at certain times to take advantage of off-peak hours, or limiting their use of air-conditioning.

Another method of saving on electricity costs is finding cheaper tariffs.

Yet finding the more affordable rates can be difficult to do, and often the electricity companies make them deliberately difficult to get hold of. That’s according to Spain’s Organization of Consumers and Users (OCU), which have identified some of the cheapest tariffs on the market today. 

Understanding peak and off-peak

Spanish electricity companies offer different prices depending on the time of day you use your electrical appliances. The tariffs are often broken down into hora punta (peak time), hora llana (flat time), and hora valle (off-peak).

If you live in Spain, this is why you might’ve heard the incessant spinning of washing machines through the night in recent months. Nowadays many people simply wait until the weekend, when the tariffs are always off-peak.

So, if you’re thinking about switching, which are some of the best electricity rates you can find in Spain?

Repsol Tarifa Largo Plazo

According to the OCU, the Repsol Tarifa ‘Largo Plazo’ can only be found via this link, because the offer is actually hidden on the Repsol website. And for good reason, too. The Repsol tariff is among the best offers the  market in terms of price per kWh consumed, although the power for off-peak time is a little more than some of the other offers on the list.

The tariff is non-permanent, with a fixed price rate for 3 years.

kWh Prices

Price per kWh consumed: €0.17/kWh.

Peak hours: €29.90 per kW.
Off-peak hours: €29.90 per kW.

Iberdrola Online Plan

The Iberdrola Online Plan, which you can find here, is only available until September 30th, so be sure to take advantage of it as soon as possible.

Using Iberdrola’s online tool, you can select a kW rate and it will give you price estimates for the different values. If you’re environmentally minded, Iberdrola’s Online Plan claims to use 100 percent green electricity, so you can enjoy renewable energy and reduce your CO2 emissions.

There’s also 14 hours of savings during the night up until mid-morning.

This plan is only for customers who take out the contract online, as the name suggests, and features entirely electronic billing.

kWh Prices

Price per kWh consumed: €0.159353 + metered gas cost (in August €0.161529 /kWh).
Price per kW contracted during peak hours (fixed term): €30.66747.
Price per kW contracted during off-peak hours (fixed term): €4.104338. 

Not the prices will be revised in line with the Consumer Price Index (CPI) on January 1st. 

Octopus Energy

Octopus Energy tariffs are not permanent and is all done online, which allows you the flexibility to move around again in the future if you come across a better offer. Octopus offer two fixed prices:

Octopus 3: price per kWh consumed during peak hours is 0.254 €/kWh; at flat time 0.209 €/kWh; and at off-peak hours 0.185 €/kWh.

Octopus Relax: price per kWh consumed of 0.212 €/kWh.

kWh Prices (both Octopus tariffs) 

Peak hours (fixed term): €32.85.
Off-peak hours (fixed term): €6.57.

Iberdrola Special Plan

The Iberdrola Special Plan offers a 15 percent discount during the first year, and its kWh prices for both on and off-peak are competitive with other cheaper tariffs.

kWh Prices

Price per kWh consumed: €0.178662 (minus the 15 percent extra discount) but plus a gas metering cost (which in August was €0.161529/kWh.)

Peak hours (fixed term): €30.52381
Off-peak hours (fixed term): €3.512901

Endesa ‘One Luz’ Tariff 

Endesa is currently offering the ‘One Luz’ tariff, which offers a 10 percent discount on consumption and an additional 10 percent reduction throughout the first year.

kWh Prices

Price per kWh consumed: €0.189 (plus the 10 percent +10 percent discount) + the metered gas cost (which in August was €0.161529/KWh).

Peak hours (fixed term): €33.86.

Off-peak hours (fixed term): €7.9973

Total Energies

Another interesting option is Total Energies, who offer entirely personalised pricing plans. Basically, Total Energies want to attract your business by outdoing your current rate. In order to receive a quote and see how it stacks up against your current provider, you simply upload a copy of your current bill to the website and Total Energies make an offer, often bettering your current rate.

If they make an offer, Total Energies promise a discount lasting for 4 years, although the price on which the discount is fixed is only valid for 12 months.

READ MORE: 11 ways to cut costs as Spain’s electricity rates beat all-time price records

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