Do you have a home loan? Ten questions about Euribor

 Do you have a home loan?  Ten questions about Euribor

noIn recent days, much has been heard about Euribor rates, as used in home loan contracts. These rates have been rising since February after the European Central Bank (ECB) admitted it could raise key interest rates this year due to rising inflation.

DECO Proteste has prepared a guide with 10 questions and answers about Euribor. Please clarify your doubts here.

1. What is Euribor?

“It reflects the price at which banks ‘sell’ money on the interbank market. Euribor is an indicator that shows the interest rate on loans that commercial banks provide to each other in the eurozone. Yes, banks also lend money to each other. and the reason is easiest to understand: because they need it.”

2. Isn’t it the European Central Bank that determines the Euribor value?

“No. What is happening is that the European Central Bank (ECB) greatly influences the behavior of commercial banks in this dynamic of interbank credit. That is, if the ECB’s policy is to stimulate the (expansionist) economy, interest rates tend to go down so money becomes cheaper and more accessible.”

3. If the banks define it, why was the Euribor negative?

“Because in 2008 a financial crisis broke out in the world, which caused shrapnel in all latitudes, and the monetary policy that the ECB has conducted since 2015 – see previous question – was of the expansionist type. Mario Draghi and the commercial banks themselves started negative setting interest rates. Euribor, which, as we have already explained, reflects these rates, went after the train and entered negative territory.”

4. Okay, but what do I have to do with Euribor?

“A lot, that’s for sure. Do you own a home? And did you buy it with a variable-rate mortgage? If the answer to both questions is ‘yes’, that’s part of the vast majority. The interest rate is determined by two components added together: Euribor (in its various maturities, mainly 3, 6 and 12 months) and fixed spread (the bank’s profit margin) results from the monthly average of the index in the month prior to the credit agreement.”

5. ‘Maturities at 3, 6 and 12 months’. Explain.

“During the mortgage contract, the value of the index is revised every 3, 6 or 12 months, depending on the maturity (ie maturity) of the chosen Euribor. The calculated values ​​for the different maturities are different. In Portugal, most loans for the house purchases are indexed to the 6-month Euribor, although the 12-month Euribor already predominates in the new contracts. The value of the installment amount to be paid to the bank can therefore vary due to periodic revision of Euribor.”

6. Is Euribor very volatile?

“It is not a fixed amount, so there is always an up-and-down, which is necessarily reflected in the monthly installment to be paid to the bank. Remember, Euribor is the variable part of the interest rate charged on the credit. is applied contract. If the average increases, so does the rate (and therefore the benefit) and vice versa.”

7. When and how was the negative interest rate applied to home loans?

“Inspired by a proposal from DECO Proteste, legislation was passed in May 2018 requiring banks to fully reflect negative Euribor averages. In early 2022, consumers are estimated to have received nearly €12 million in negative interest, an average of €326 per contract. For instances where the index average exceeded the value of the spread, credit was created to lower future interest rates, although most banks have deducted this amount from debt capital.”

8. Even though Euribor was negative and the passed legislation is not retroactive, how much have I lost?

“We answer by means of an example. If you had a mortgage loan of 150 thousand euros in 2016, with a spread of 0.25%, added to a 3-month Euribor (negative, in May 2018), you will receive almost no 190 euros until the law comes into effect .”

9. When is the Euribor expected to stop rising?

“It won’t be for now. Because it’s a variable index, these swings happen naturally, and that thought should always be in the mind of anyone taking out a variable-rate home loan. For the simple reason that a contract like this lasts, 30 years on average. It is not at all credible, and history does not prove it, that Euribor did not have several lives during that time. Therefore, after a period of negative interest rates, since the beginning of 2022, a strong movement began to climb.”

10. Esther, who are you?

“It is short for Euro Short-Term Rate and could replace Euribor. There has long been talk of finding another index, for reasons of transparency. Euribor is susceptible to manipulation, as it does not reflect real market conditions, because the results of values ​​declared by banks (in a kind of “price intention”) and not of transactions actually executed.”

Also read: Euribor rates rise to new highs after 3 and 6 months and fall after 12 months