A rise in interest rates on mortgages is a scenario that is on the table, and the European Central Bank (ECB) has already admitted the possibility of increasing the key interest rate in 2022. One of the consequences of this measure will be a rise in Euribor rates, which could thus return to positive territory sooner than expected. If this were to happen, many Portuguese would see their mortgage payments skyrocket, which would have an impact on their family budget. But what are Euribor rates anyway? How and why do they affect the monthly payment to the bank?
We explain it all in this week's Deco Alert article, the weekly feature provided by Deco - the Consumer Protection Portuguese Association* for idealista/news, which is aimed at all consumers in Portugal.
Lately, I've been reading a lot of news about Euribor and its rise as far as mortgages are concerned. But I don't know exactly what it is about. Can you explain what Euribor is?
As you rightly say, those who have a mortgage contract with a variable rate, surely have heard about Euribor, since it is this index that is used to calculate the interest rate. Since it is widely used in mortgages and since it represents a big slice of the monthly expenses of families in Portugal, it is necessary to know to what extent this indexing factor influences the loan instalment.
Euribor is the average of the interest rates charged on short term loans made by a group of European banks. This rate is calculated daily and varies according to the term. In the case of mortgages in Portugal, it is common to apply Euribor at six or 12 months.
When you take out a variable-rate mortgage, the interest rate applied to your monthly instalment will be made up of two elements:
- The spread, which is the profit margin that the bank collects for you and which is defined based on the customer's risk;
- The Euribor.
The spread is a fixed component (what is established between the customer and the bank in the credit contract does not change, with some exceptions), but the Euribor is not. If it increases, the monthly instalment of the house also increases. If it goes down, the monthly instalment is also reduced, making it more affordable for the debtor.
If the loan has a fixed rate, then the monthly instalment will not change during the whole credit period. However, in a scenario where the Euribor is below zero, it usually pays to contract with a variable rate, since the monthly instalment will be lower.
Some banks also offer a kind of mixed rate: a mortgage contract where the first 5, 10, 15 or more years are fixed rate, then variable rate after a certain time.
A rise in the interest rate will lead to an increase in your mortgage payment, so you may have to revise your monthly budget to be able to pay for the mortgage.