Home loan. Term can be up to more than 100 euros

 Home loan.  Term can be up to more than 100 euros

The alarm is sounding again about the new interest rate hike by the European Central Bank (ECB). This is the third ascent this year and the meeting is scheduled for tomorrow. According to experts at i, all indications are that the entity led by Christine Lagarde will once again opt for the most pessimistic scenario: an increase of 75 basis points. All to try and stop the escalation of inflation.

The rise in interest rates will affect Euribor rates, which are also rising, making credit more expensive, for example the value of monthly mortgage payments. A situation that will also affect those who are thinking about applying for a loan.

What could that mean? In an analysis by ComparaJá.pt made for oi, for a property with a value of 125 thousand euros, payable in 33 years, if the repayment in June 2020 was set at 383.11 euros per month, this value rose to 423 .87 euros for July this year and for 432.09 euros in August. If we combine this installment amount with the foreseeable increase in interest rates, you will pay EUR 481.27 in November. That is almost 50 euros more per month – and 100 more than two years ago.

For a property worth 186 thousand euros, payable within the same period (33 years), if you paid 565.54 euros in June 2020, the repayment rose to 578.77 euros in the following year, that value shot up to 642 in August .95 euros. With this interest rate increase, he pays a term of EUR 716.13 in November. That is a monthly increase of 73.19 euros.

The scenario deteriorates for a house of the order of 275 thousand euros. The installment amount in June 2020 was set at 836.15 euros per month, this amount increased to 932.52 euros in July of this year and to 950.50 euros the following month. If this increase of 0.75% occurs, it will pay a monthly amount of 1058.80 in November. After all, more than 108 euros per month.

João Melo, director of this platform, recalls that “Never in the history of banking have the Euribor rates risen so sharply in such a short time and that the Portuguese are already starting to feel the exponential increase in credit terms in their portfolios.” “.

As for the future and trends in banking, he guarantees that “it’s hard to predict what will happen next, but there is every indication that interest rates will continue to rise”. In addition to this increase, one has to count on “inflation in the economy and the constant rise in electricity and gas prices, which contribute very little to the financial well-being of the Portuguese”.

What to expect? For Ricardo Evangelista, senior analyst at ActivTrades, it is difficult to predict what the trend will be until the end of the year, but he recalls that the market expects the benchmark rate to reach 3% when the current upward cycle ends in February.

“The expected increase of 75 basis points next Thursday brings this rate to 1.75%. Since we still have three monetary policy decisions until the end of February, the next increase could be 0.75, 0.5 or even 0.25%,” he tells our newspaper.

The official guarantees that this effect of the rise in ECB interest rates will be felt on Euribor rates, which will also tend to rise, making credit more expensive. “Such a scenario will be negative for those who pay home loans and have not opted for fixed rates,” he assures.

Henrique Tomé, an analyst at XTB, also believes that, following Thursday’s predictable 0.75% rise, the ECB should raise interest rates again by the end of the year, this time by 0.50%. “But these are only projections and could be changed if inflation continues to show signs of persistence,” he analyzes.

He adds: “With the increase in the reference rates, it is expected that all other rates, namely the Euribor rates, will also rise. Portuguese who have taken out floating-rate mortgages (representing more than 90% of mortgage loans in Portugal) will be penalized by increases in bank repayments.”

Paulo Rosa, economist at Banco Carregosa, also bets on a 0.5% increase at the next meeting, but recalls that until then, the Euribor-linked interest rates will reflect these expected increases for the evolution of the ECB’s monetary policy and the respective interest rates on your deposits.

“The 12-month Euribor is currently at 2.78% and ECB interest rates are expected to peak at 2.84% next summer. The monthly fee is only increased on the index maturity date. three-month Euribor , the tranche will be revised every quarter and the interest rate renewed. In the six-month Euribor, every semester and in contracts with an index of 12 months, the revision is only annual. The 6-month Euribor is 2.11% and the 3-month Euribor at 1.54%, in line with the outlook for the evolution of ECB deposit interest rates,” he emphasizes.

interest versus inflation Henrique Tomé recalls that rising interest rates are the most commonly used tool by banks to fight inflation. “By raising interest rates, central banks are able to ‘cool down’ economic activity, thereby curbing the effects of inflation.” He adds that “it is not the only option, but it is the least ‘aggressive’ of all options”.

However, he admits that this decision could jeopardize growth targets. “It’s the price you have to pay to stop inflation: a decline in economic activity that ultimately hurts GDP.” However, he adds that these measures do not always lead to periods of deep recession.

“Usually we see short periods of GDP contraction (recession) that serve to balance prices in the economy. Despite everything, the economy is currently strong and although banks have been betting on sharp rate hikes, there are still no concrete indicators that these increases could lead to a deep recession.”

Ricardo Evangelista recalls that higher interest rates have an impact on demand, which helps to contain price increases, but that is not enough. “Part of the inflation we are now experiencing is supply-generated, especially in the energy sector. The rise in interest rates alone is not enough, because the phenomenon is also influenced by exogenous factors.”

But he warns: “Higher interest rates lead to a reduction in investment and consumption, with a negative effect on employment”.

More pessimistic is Paulo Rosa, who points to a scenario of stagflation similar to what happened in the 1970s. “It is true that the war in Ukraine further accelerated energy inflation and worsened food prices, but in fact inflation in the Eurozone widening and the prices of services also follow this continuous price increase. The possible replacement of some purchasing power, after a significant decline in the disposable income of households, namely wage earners, also increases the likelihood of a wage/inflation spiral, increasing the likelihood of a stagflation scenario.”