Will your home loan be reviewed in October? The 125 euros from “Families First” may not be enough to pay the increase

 Will your home loan be reviewed in October?  The 125 euros from

Those who have a mortgage that needs review in October will feel the (huge) rise in interest rates that has been felt since the beginning of the year. Watch the simulations and learn how to defend yourself

The Portuguese with mortgages who have their contracts revised in October are in for a huge and unpleasant surprise: the monthly payment of the house is going up considerably.

And taxpayers with housing loans under the “Família Primeiro” program, which will receive $125 from the state to help meet the general price hike, may not have the time or opportunity for major spending. In most cases, the check will not be enough to pay the increase in the monthly installment of the house and even for a couple, where both receive the installment, the money will disappear quickly.

All this is happening because since the European Central Bank (ECB) indicated that it would raise interest rates, precisely to fight inflation, Euribor rates have also risen. And this increase was reflected in home loan contracts that were revised month after month.

But as Euribor’s gains picked up (much) since May this year, as the ECB’s first policy rate hike approached in the past 11 years, the impact will now be greater.

The first rate hike by the ECB took place in July, from zero to 0.5%. And in September it rose again, to 1.25%.

The result was a huge increase in Euribor rates: the monthly average of the six-month Euribor, which is still the most used in Portugal, went from a negative value in May to 0.837% in August. And in September, even with data from last Friday the 16th, it’s already at 1.432%.

And this is the first assumption needed for the simulations: whoever has the contract revised in October will have this revision made with the average of the Euribor of September. As rates rise, it makes sense that the whole month’s value would be higher than the average for the first half of the month. That makes the following simulation sensible.

Contracts indexed to 12-month Euribor with more impact

The contracts revised in October that will be most affected by the increase in terms are those indexed to the 12-month Euribor. These contracts are only revised from year to year and as such, those in these circumstances have not yet felt an interest rate rise in 2022.

But now you will. In these cases, with a loan of 150 thousand euros, over 30 years, with a spread of 1%, the repayment will increase by more than 40%. The holder of this contract has paid slightly more than 449 euros per month since October 2021, but will now pay more than 633 euros. The increase is more than 184 euros.

delivery in October

150 thousand euros, 30 years, spread 1%

Euribor 12 months

is paying

449.31

Go pay

633.70

increase

184.39

The increase is also significant for contracts indexed to the six-month Euribor. In this credit, the installment amount has been slightly more than 454 euros since April, but from October it will be more than 587 euros. That is another 133 euros per month. Moreover, in this case, when the contract was revised in April, the advance had already been increased, but only by about seven euros.

delivery in October

150 thousand euros, 30 years, spread 1%

Euribor 6 months

is paying

454.27

Go pay

587.39

increase

133.12

The effect is smaller, but still significant, for contracts indexed to three-month Euribor. The installment amount has been EUR 466.17 since July and will increase to EUR 546.74 from next month. That’s another 80 euros per month And this contract already has two revisions this year: another six euros in April and another 17 euros in July.

delivery in October

150 thousand euros, 30 years, spread 1%

Euribor 3 months

is paying

466.17

Go pay

546.74

increase

80.57

How to avoid interest rate hikes?

In view of the general rise in interest rates and monthly repayments on mortgages, savings and credit specialists have drawn attention to the need to look at two figures: first check whether the Euribor rate is above 2%; then the effort percentage, i.e. the weight of the benefit in the net income, is more than 35%.

In the case of 12-month Euribor, the average for the first half of September already shows that the 2% level has already been exceeded. For the six-month Euribor, the average is still just above 1.4%, but the trend is upwards. With three-month Euribor, the value is still below 1%.

At the first alarm signal, it is necessary for each credit agreement holder to estimate the weight of the installment he pays, or what perspective he will pay, in the monthly net income.

And if it reaches or exceeds 35%, the same experts advise credit holders to report to their bank that they are or may be in difficulty paying the credit.

At this point, the bank can propose solutions ranging from extending the loan term, renegotiating the spread, or grace periods for interest payments. All ways to lighten the monthly costs.

And even for those who are not in trouble to pay the installment, there are solutions to avoid future problems. One of these, for those who have savings, may be paying off a portion of the loan early. Another could be to switch to a flat rate.

Portrait of home loans in Portugal

At the end of 2021, the most common indices were the 6-month Euribor, in terms of the number of contracts, and the 12-month Euribor, in terms of outstanding balance.

The 6-month Euribor was the index for 40.5% of the contracts and 29.1% of the outstanding balance, while the 12-month Euribor was the index for 28.1% of the contracts and 40.4% of the outstanding balance.

The 3-month Euribor continued to represent less than a third of the mortgage portfolio.

The average spread of the portfolio at the end of 2021 was 1.21 percentage point.

At the end of 2021, floating rate contracts represented 93% of the number of contracts in the portfolio and 91.1% of the outstanding balance.

Most contracts at the end of 2021 (64.4%) had an initial term between 25 and 40 years, with an emphasis on terms between 35 and 40 years (27%) and between 25 and 30 years (24.2%) . The remaining term of the contracts was 21.5 years at the end of 2021.

The average term of the contracts in the portfolio as at 31 December 2021 was 33.5 years.

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