Anyone who follows the news, reads the newspapers, surfs the internet or simply scrolls through their Facebook homepage will come across very frequently in terms such as spreads, mortgages and other financial words increasingly in the limelight in recent periods.
Who among you does not remember the anxiety, concern and fear that the word spread aroused us just a few years ago enough to make us fear an unimaginable crack and failure of the Italian state?
Conversing with a colleague, a family member or simply with an acquaintance, it is not uncommon to come across a conversation about the spread, especially when we are discussing political issues, or talking about mortgage interest rates , tips for paying less, which mortgage is better to choose and so on.
Here we will try to explain as clearly as possible what is meant by spread and how and if the increase in the spread affects mortgages . We simply need to overcome the fear of dealing with issues belonging to the world of finance that seem so far away from us but that in reality are much closer to us than we can believe, so much so that these have a direct impact on our daily lives.
What is the spread?
You could bet any amount on the fact that we have all heard of spreads at least a dozen times in his life. By now the word spread has become part of our common jargon although most people do not actually know what is meant by it.
At this point we can say that the spread is the differential between the yield of the Italian BTPs and the German Bunds with a ten-year duration.
The spread is linked to public debt
To understand well, let’s start from the beginning. As is well known, states in order to be able to implement their economic policies need monetary resources which, in other words, they obtain through the taxation that is imposed on taxpayers. Generally, however, the resources thus obtained by the States are lower than the expenditure made by them.
Especially in these years in which there has been a sharp slowdown in the economy of the entire planet, since there has been a contraction in employment and a reduction in the number of businesses, on the one hand, revenue for the Treasury on the front has decreased of taxes and duties, on the other hand the state had to increase expenses to cope with conditions of economic and social hardship to help all the people who found themselves in difficulty because of the crisis.
Meaning of the spread
Once understood what the spread is and how it is connected to public debt, all that remains is to understand its economic and financial significance. Above it has been said that the spread is nothing more than a number that comes out of a trivial subtraction between the interest rate at which the Italian Treasury sold ten-year BTPs to investors and the interest rate present on the German Bund.
This means that the greater the spread, the greater the difference between how much the Italian state will pay in interest to investors who have purchased Italian public debt than the interest that Germany will pay to those who purchased German public debt securities.
This difference, in financial terms, expresses nothing but the different degree of confidence that investors have in Italy and Germany. It is no coincidence that the reference point for calculating the spread within Europe is represented by the yield of German securities as Germany is seen by investors as the European state that offers a greater guarantee for the repayment of its public debt.
At the level of public debt, all this translates into the simple mechanism that if the spread increases (for example due to political tensions in Italy or because GDP has grown less than the government had previously estimated) Italy will have to pay higher interest to finance your debt.
How and if the spread affects mortgages
The main fear of those who listen to negative news on the rise of the spread is that of seeing their own installment of the variable mortgage grow. But in reality, at least in the short to medium term , those who have a variable rate mortgage must be calm because the increase in the spread has no direct effect on the increase in the interest rate applied on the mortgages in force .
We better understand why. The interest rate applied to the loans granted by banks are the result of the sum between two distinct indices or rates which are: the spread and the Euribor for variable rate mortgages (Euris for fixed rate mortgages).
The spread applied by the bank, however, is very different from the common spread that is often talked about on the news and above has been widely discussed, in fact the spread applied by the banks is nothing more than a markup (a margin) that each bank applies for the purpose to get a profit as a “reward” for lending money.
The other two rates, on the other hand, are the result of the so-called interbank market and the Euribor will affect the installment of the variable rate mortgage while the value of Euris in force at the time of stipulation of the fixed rate mortgage will determine the interest rate which will be applied on a constant basis. for the duration of the mortgage.
Obviously, those who have a fixed rate mortgage therefore have nothing to fear because the interest rate is fixed and is written in the loan agreement.
The holders of a variable rate mortgage have fewer certainties who know that the interest rate is variable and not constant, however Euribor (the person responsible for the trend of variable interest rates) is disconnected from the spread phenomenon relating to government securities since this rate is mainly influenced by the monetary policy implemented by the LLB.
In fact, it is thanks to the expansive monetary policy decided by Mario Draghi that the interest rates relating to mortgages have been particularly advantageous for a couple of years now.
The increase in the spread could adversely affect mortgages only in very rare cases, for example if the increase in the spread should occur in relation to situations of very serious tension on the country’s economy and which therefore could lead banks to protect themselves to an extent greater on the granting of new mortgages by asking for a higher interest rate to offset this risk.