Positive interest rates in Portugal: what is Euribor and why does it matter so much?

Euribor rates are part of the lingo that must be known by anyone who has or is going to apply for a mortgage in Portugal. A lot is currently being said about Euribor interest rates, which have been in negative territory in recent years, but earlier in April 2022, the 12-month rate returned to positive values. This is a scenario that was already expected and that became even more likely with the outbreak of the war in Ukraine. What could this rise in interest rates mean? What impact will it have on mortgage payments to the bank in Portugal? And what is the Euribor to begin with? We have the details.

What is the Euribor?

Euribor rates (the Euro Interbank Offered Rate), as you can read on the Bank of Portugal's (BoP) website, are the reference interest rates for the euro money market for maturities between one week and one year. 

What is the Euribor used for?

"Euribor rates are also used as a reference in several financial products, such as mortgages in Portugal with a variable interest rate and interest rate instruments (bonds and derivatives). They correspond to the rates at which credit institutions in countries belonging to the European Union and the European Free Trade Association (EFTA) can obtain funds in euros on the wholesale unsecured money market for different maturities," says the banking regulator and supervisor, pointing out that "Euribor interest rates were declared by the European Commission in August 2016 as critical interest rates for their systemic importance in the financial system." 

Euribor rates, which are set by the average of the rates at which a set of 57 Eurozone banks are willing to lend money to each other on the Interbank market, are calculated daily and vary depending on the maturity. In the case of mortgages in Portugal, it is common to apply Euribor at 6 or 12 months, with 6-month index being the most used within the total volume of contracts.

How does the Euribor affect mortgages in Portugal?

When you take out a variable-rate mortgage in Portugal, the interest rate applied to your monthly instalment payable to the bank, which can be for 3, 6or 12 months, will be made up of two elements:

• The mortgage spread: this refers to the profit the bank obtains by lending you money when you have a variable-rate mortgage and is set based on the customer's risk
• The Euribor

The mortgage spread is a fixed component, which is established between the customer and the bank when the mortgage is granted, but the Euribor is not. In other words, if the Euribor increases, the value of the monthly instalment of a mortgage will also increase; if it decreases, the monthly instalment also decreases. 

In a scenario where the Euribor is below zero, it normally makes sense to take out a mortgage with a variable rate, as monthly payments will be lower. And this has been the case for several years. But now, in the case of the 12-month Euribor, rates have gone back into positive territory, which suggests that the same may soon happen with the 3 and 6-month rates. As a result, many homeowners in Portugal are considering changing their mortgage from a variable rate to a fixed rate.

Why is Euribor rising?

Alarm bells went off after the European Central Bank (ECB) admitted in February to moving the key interest rate as early as 2022 to curb inflation in the Eurozone. Inflation was rising and threatening to escalate following the armed conflict between Russia and Ukraine. 

Since then, Euribor rates have been volatile, with a rise expected and now confirmed. At the same time, if the ECB decides to raise its key interest rates, it is certain that Euribor rates will also rise, as there is a direct relationship between the two.