Why a 14% mortgage in 1990 was less of a burden than a 4% one today

From 14% to 4%: why that mortgage didn't suffocate and this one does

A 14% interest rate was commonplace in 1990 mortgages. A 4% rate in 2023, with Euribor rising, has become the last straw for thousands of household budgets. The contradiction is not in the percentage, but in everything underneath: the price of the flat, the loan term and, above all, whether wages rise with inflation or not. The interest rate alone says nothing.

Someone who bought three decades ago remembers the first years tightening their belts, but also that it gradually deflated on its own. That mechanism no longer works today.

Why was a 14% mortgage payable while a 4% one is suffocating?

Because 14% was charged on a debt that was a fraction of today's. Back then a flat was bought for 6 million pesetas; today the same type of home, in the same area, costs around 30 million pesetas. The rate was higher. The base on which it was calculated bears no comparison. With €30,000 of principal, 14% a year is still a digestible payment; with €170,000, 4% eats up an entire salary.

The comparison error is that: looking at the percentage and not the amount. A 1995 flat was bought for €18,000. Today, for that money, in many major cities you can't even buy a parking space.

Housing prices multiplied, wages did not

Here the second problem appears. It is not just that the flat costs more: it costs much more relative to wages. A flat bought in 1993 for €90,000, updated with the INE (Spain's statistics institute) calculator, would be €189,000 today, and on the market it is worth about €200,000. In that specific case, housing rose with CPI or a little more. The gap did not come from bricks. It came from wages.

While housing doubled in price, wages rose by 20% or 25%. Three decades of difference. There lies the trap, and no interest rate can cover it up.

Inflation ate away the debt, but only if wages rose

This is the decisive factor, the one almost nobody looks at. In the years of high rates, inflation was close behind: if CPI stood at 11%, wages were revised up by at least that 11%. The bank payment, by contrast, was frozen. Result: in five or six years, the instalment that originally suffocated was diluted until it looked like a minor bill. The debt unwound itself.

That worked on one condition: that wages were indexed to inflation. When that link breaks, the effect reverses. We have had three decades of wages decoupled from CPI, and the same inflation that relieves debts becomes a loss of purchasing power for those earning the same as years ago.

Terms: from 15 years to 40

The nominal rate is also misleading because of the term. Loans used to be signed for 10 or 15 years, sometimes less, and paid off quickly. Now they stretch to 30 and even 40. The more years, the more total interest: some calculate that a 40-year mortgage at 5% costs more, in euros of interest, than a 15-year one at 14%.

Terms were extended so that the monthly payment would square with increasingly high prices. That rope was stretched so tight that the bank ended up selling, above all, a monthly payment. And the price adapted to what that payment could bear.

Taxes, IRPF (Spanish income tax) not indexed, and less disposable income

Part of the analysis focuses on taxation. It is argued that income pressure was lower before and that IRPF has not indexed its brackets since 2016, so an accumulated inflation estimated at around 30% has been raising the tax without anyone touching the thresholds or the personal allowance. The consequence is simple: less disposable income to pay the same instalment.

Others add that the weight of the State and of social security contributions has also grown along the way, and that this is felt just the same in every pay packet. The figure is debatable; the direction is hard to deny.

Banks lent less and the market was less speculative

There was a time when banks would not let you take out a mortgage for more than a third of your income or finance more than 80% of the value. That put a ceiling on what each family could pay and, at the same time, a brake on prices. Today people buy at the limit of their borrowing capacity, so any small rate rise puts the buyer out of the game.

Added to that is the speculative component: much demand enters convinced that the price will keep rising, not that the house is worth what it costs. When the expectation is of permanent increases, the market stops behaving like a market.

With these ingredients, the opening question has an answer and none at the same time. The high rates of the past were sustainable because the flat was cheap, wages rose with CPI and the term was short. Today's low rates suffocate because the flat is expensive, wages stay still and the term stretches endlessly. Which factor weighs more —price, wages or tax— remains disputed.