After months at historic lows, the Euribor rate turned to positive values with a tendency to rise even more. Families are now seeing their budgets compromised, especially those who have taken out a variable-rate mortgage loan.
Find out how to deal with the increase in the Euribor with these recommendations and minimize your financial effort.
What is Euribor and why has it increased?
The Euribor is the interest rate that banks in the Eurozone pay for lending money and serves as a benchmark for most home loans. This fee is not fixed; it is subject to daily fluctuations, depending on the average interest rates of the most active banks in the Eurozone.
The Euribor rate has remained at a relatively comfortable level for Portuguese people who have taken out a mortgage loan. However, experts had already issued some warnings, predicting that this rate would rise, and it did.
Indeed, the Euribor rate continues to rise at full speed and has thus naturally raised concerns among families, who may find themselves in a more vulnerable financial situation. Those who have a variable rate mortgage loan will see the mortgage payment increase as soon as it is revised.
Why did the Euribor rise?
The increase in the Euribor rate is the result of the financial consequences of the war in Ukraine. The war is driving inflation in the eurozone and in response the European Central Bank (ECB) has adopted a more austere financial policy and raised interest rates.
This change began to show its first signs in February 2022, when the ECB itself admitted this possibility and since then the Euribor rate has been particularly volatile. What was foreseen is now confirmed: the Euribor has risen and will continue to rise, causing Portuguese household spending to skyrocket.
However, there are some ways to counter the rise in Euribor. Below we explain how you can renegotiate the terms of your Mortgage Loan and thus minimize the impact on the financial health of your family.
6 ways to counter the increase in the Euribor
Now is the right time to review the terms of your mortgage loan. It should act now and not wait for the rate to rise even more to do so. When you renegotiate with your bank, you should take the following aspects into account.
1. Negotiate the spread again
The spread is part of the amount you pay the bank each month for the home, and is the profit margin the bank gets for lending you money. It is therefore freely determined by the banking system and does not depend on external financial factors. It is therefore a value that the bank can manage independently.
Try to reduce this part in order to also lower the value of your monthly amount. However, before going ahead with this proposal to your bank, compare the spreads applied by other financing entities to get a more complete picture of current market conditions and how far you can go.
2. Consider switching to a flat rate
You can also assess together with your bank whether it is worth switching to a fixed interest rate. With this rate type you are immune to Euribor fluctuations; the amount of the fee, as the name implies, is always the same. So when the Euribor rises or falls, the rate remains unchanged.
It is true that it will not be harmed by the increase in Euribor, but it will also not benefit if it falls. Also, fixed rates are always higher than variable rates, it is the price of stability.
Therefore, carefully evaluate and carry out simulations before proceeding with any amendment to the contract. Make sure that the amount you pay for the fixed interest rate outweighs the amount of the variable interest rate, now increased by the increase in Euribor.
3. Check your life insurance policy
See if you can save more with the life insurance that comes with your Mortgage Loan if you rent it outside the bank. This is also part of the total amount you pay to the bank, which is not dependent on the European economy.
Do a market research on the competitive conditions and see if they are more beneficial for your business. Keep in mind, however, that having a life insurance policy with the same entity that you took out a mortgage loan from may have led to other benefits, such as a more attractive spread.
So check in your final bills whether a cheaper life insurance policy compensates for the loss of this or any other benefit agreed at the outset.
4. Consider transferring your credit
You can also consider transferring your Home Loan to another bank. It all depends on who offers the best conditions. Therefore, analyze the competition and ask for proposals from other financial institutions.
Check whether they propose a more comfortable spread for your family budget and compare the proposals via the APR and choose the lowest. If you find a Mortgage Loan that suits you better, you can make the switch and thus reduce the monthly amount.
You can make this decision at any time, but you must notify the bank 10 days in advance and, as with the first loan, provide all the documents necessary for the contract.
5. Amortize part of the debt
If your savings allow, consider paying off the debt partially, i.e. prepaying a fraction of the credit (without, however, calling on your emergency fund). In this way, it manages to reduce the capital debt and, consequently, the monthly payment.
Please note that this promotion may also have a price. As a rule, banks apply a penalty, calculated on the basis of a percentage of the amortized capital. That’s why it’s important to understand whether what you’re going to pay for the amortization is worth the monthly fee reduction.
6. Perform a credit consolidation
If you have several credits at the same time, you are probably paying different entities with different terms. In this case, consolidating credits can be a good option.
By merging all credits into one, you get better conditions and one lower monthly amount. Usually, the interest on a consolidated loan is lower than the average interest on any loan you hold.
This advantage comes from a longer payment term. However, it may be more beneficial to pay for a longer period when this means more liquidity each month to absorb the effects of the Euribor increase.