Home loan: interest rates have already risen more than in the crisis of 2008. Let’s see how far they can go

Home loan: interest rates have already risen more than in the crisis of 2008. Let's see how far they can go

The deadlines will skyrocket from next week, when October starts. Interest rates are quickly rising to 3% and the OECD is already admitting rates as low as 4%. It’s TVI’s new weekly item, “People are not numbers”

Do you have a home loan? So prepare yourself: October is the first month in which you will experience a large increase in your mortgage payments.

Nearly 19 out of 20 mortgage loans in Portugal have a variable interest rate, with installments reviewed every three, six or 12 months, according to the contract index. However, the update takes into account the average Euribor of the previous month. And September was the first month in which the Euribor average was much higher. That’s why the big effects start in October. Next week.

The 6-month Euribor (the most used in Portugal) is about two percentage points higher than six months ago, in March. And the 12-month Euribor (the second most used) is almost 2.5 percentage points from what it was a year ago.

Hence the simulations. For example, with a loan of 150 thousand euros over 30 years, indexed to Euribor 6 months, the repayment increases by 141 euros, from 454 to 595 euros. In the same example, but indexed to Euribor 12 months, worse: the increase in October that the tranche is revised is 194 euros.

Still 21 years to pay

More than 1.43 million Portuguese families have a total of more than 100 billion euros in mortgages. And on average, it takes about 21 years to pay off the loan.

This means that, with only the Euribor increases so far verified, Portuguese families will pay a year more of at least two billion euros a year.

What is the average performance?

But how much do the Portuguese owe today and how much do they pay?

On average, every Portuguese with a mortgage owes around €60,000 to the bank – and pays €268 per month. These people pay about 100 euros more per month.

But if we look at who bought a house in the past three months, with the most expensive houses, then the average debt is 128 thousand euros – and the monthly payment is 445 euros. An advantage that goes up to about 200 euros per month.

And in the future? Adults without time and younger without money

In the future, it will be more difficult to buy a house with credit. For three reasons:

First, because credit is more expensive, the advance will weigh more heavily on household income. And as a result, the banks themselves will say no more often and reject proposals from customers who want to buy a house.

Second, because older adults have less time. Since April 1, the Bank of Portugal has imposed new age-based rules, which in practice reduce the maturity of loans from 40 to 30 years. And that means higher monthly payments. Only up to 30 years it is possible to have a credit of 40 years. The problem is that…

… Third, the youngest have no money. Housing is one of the biggest problems for young people and it is even one of the reasons why young people do not leave the parental home.

Portugal is indeed the country of the European Union where young people leave home later, on average 33 years and 7 months old (with women leaving later than men). This is almost seven years later than the EU average and, for example, almost 15 years later than the Swedes.

Interest continues to rise?

You can remove the question mark: interest rates continue to rise. The ECB announced yesterday that it will raise interest rates again by at least 0.5 percentage point in October – and it doesn’t stop there. For this reason, the Euribor (which has already exceeded 2.5% in 12 months when it was negative a year ago) is rapidly approaching 3%.

Worse, in a report released yesterday, the OECD made an estimate that went unnoticed: it already admits that central bank interest rates are at 4%.

Yes, the rates are going up.

Euribor has already risen more than the financial crisis

This is another aspect that has gone unnoticed. Many people wonder whether Euribor can reach the record set in October 2008, in the midst of the financial crisis, when it exceeded 5.5%. Everything will depend on the evolution of inflation, but even the pessimism of the OECD does not indicate such high values.

It turns out that it is not the Euribor value, but the increase this year that is already greater than in 2008. That year, the Euribor rose by approximately 1.1 percentage points between February and September, from approximately 4.2% to 5.5%.

For example, the 12-month Euribor rose this year from around negative 0.4% in early February to over 2.5% in early October.

So the installments are not as expensive as they were then – but more than twice as high as they were then, in the year when banks like Lehman Brothers or, in Portugal, BPN and BPP went bankrupt.

This analysis is carried out in the new “People are not numbers” section, which airs every Tuesday on TVI’s Jornal das 8.

Note: Cited Sources of Information

Portuguese bank

– Credit markets monitoring report

– Interest rates and amounts of new loans and deposits: July 2022 statistical information

– Debt of the non-financial sector

– Amounts-Loans-Private loans UM-Housing-M€ (new operations)

INE

– Interest rates implied in home loans – August

interest rates

– Euribor

– ECB interest rates

OECD

– Economic Outlook, September 2022 Interim Report: Paying the Price of War

Eurostat

– Leaving home: young Europeans spread their wings

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