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Mortgages
What mortgage indices are used in Spain?
The IRPH and other Spanish mortgage indices
Let's start by defining what a mortgage index is: it is a benchmark that is used in calculating the interest rates we will pay on our mortgages, so that they are always in line with market prices. Let's start with the most common: the Euribor.
The Euribor
(Euro Inter Bank Offered Rate) is the most common index. It is benchmarked against the cost at which European banks lend to each other. It is calculated as the average of the daily values of the interest rates of eurozone banks, removing the highest and lowest 15%. Practically all mortgages are currently calculated using the Euribor. However, we should also be familiar with some other indices:
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Other mortgage indices
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The Mibor (Madrid Inter Bank Offered Rate)
This is still used for loans arranged before January 2000, it is benchmarked against the cost at which money is lent in the Madrid market for one year. The internal yield in the secondary public debt market. This index is based on trades involving public debt securities with a residual maturity of two to six years. It does not involve banks or financial institutions It is calculated based on the returns on public debt in the secondary market (i.e. the financial market for trading securities issued in the primary market).
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Interest rate swaps (IRS)
Or the change in interest rates calculated every five years. This was initially expected to replace the Euribor, but it was unsuccessful in this as it did not meet the needs of the Spanish mortgage market.
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Mortgage Loan Benchmark Index (IRPH, for the Spanish acronym)
This considers the average interest rate for three-year mortgages applied by banks for the purchase of a home in general. There used to be three variants of this: one for savings banks, one for banks, and one for all entities. Only the latter of these has been used since 2013.
The IRPH started to be used in 2008, taking advantage of the Euribor being at a historical high. This used to be the most commonly used after the Euribor, although it was quite controversial due to its limited transparency and fell into disuse. The supposed advantage of the IRPH compared to the Euribor was that is oscillated less and, in theory, could not rise as much. However, in practice it is more expensive, and may increase mortgages by between 1.5% and 3%.
As a result, it became very unpopular as an index, as it was always higher than the others, for no apparent reason. In addition, the calculation of this index cannot be audited: it can be influenced by the credit institutions; it does not reflect the actual conditions in the market and can be predicted by credit institutions.
In conclusion, we can say that it is flawed and frowned upon today, and it is subject to transparency control.
So, despite all the current indices, only one is really used in practice today. Even so, when choosing our mortgage, it is important to look at more than just the monthly payment in the first year, as, for example, the terms of variable-rate mortgages change with every revision. It is very important that we consider the spread and the benchmark rate, and graphs of the performance of these indices.