The European Central Bank (ECB) has decided increase key interest rates by 0.5%. This rise turned out to be higher than what was being anticipated, although in recent days expectations have grown that the central bank would go further than the 0.25% increase. On the basis of this decision is the escalation of inflation that takes place in the Eurozone.
“The Governing Council of the European Central Bank (ECB) today took key new steps to ensure the return of inflation to its 2% medium-term target. The Governing Council decided to increase the three key ECB interest rates by 50 basis points and approved the Transmission Protection Instrument (IPT).
Brief history of Euribor: Guide to understand what’s coming
In June, Christine Lagarde, president of the ECB, had assumed she was going to raise interest rates. The initial expectation was that the central bank would raise interest rates by 25 basis points. However, in recent days, with the euro reaching parity with the dollar – which leads to an increase in the prices of imported products – it was necessary to accelerate the fight against inflation.
This is the first time that the ECB has decided to raise interest rates in more than 10 years, thus ending negative interest rates in the Eurozone. But, after all, what impact will this decision have on family budgets?
Also read: Interest rates to rise: How far can I increase my credit?
Mortgage loans are on the rise
The rise in key interest rates will be reflected in mortgage loan contracts with variable rates. In these contracts, the interest rate is made up of spread and at the Euribor rate. Thus, the provision of credit varies according to the fluctuation of this index. As a rule, Euribor rates anticipate the movement of the reference rates determined by the ECB, which has dictated an increase in these rates.
Thus, Euribor rates, which last year were on negative ground, began to rise progressively since the end of the year, already anticipating that the ECB would need to intervene. In March, the upward movement was accentuated and in April the 12-month Euribor was already at positive values.
This behavior means that all credits associated with a Euribor rate are already experiencing increases in installments. At a time when interest rates are rising and the rate of inflation is high – unless you guarantee an increase in your income – the available monthly budget will necessarily be smaller.
It is important to realize that the central bank acts in a progressive form, and, consequently, Euribor rates also rise progressively. And although no one can say how far you can increase your credit performance due to the rise in interest rates, you should prepare yourself and understand what impact it can have on your portfolio.
For this, you can use the Euribor Variation Simulator in Housing Credit developed by Doctor Finanças.
To get an idea of the impact of Euribor evolution, using the simulator, if you have a credit of 120 thousand euros, with a spread of 1.2% in which there is still to settle 300 installmentsyes, would pay 455.30 euros per month. This value takes into account a 6-month Euribor rate with the value of May 2022 (-0.144%) and a TAN of 1.056%.
Now, if in the next review, the Euribor at 6 months reached 0.01%its TAN would rise to 1.210% and its credit provision for 463.75 euros. That is, its performance suffers a increase of 8.45 euros.
If we opt for a scenario with a more significant rise in Euribor, as for example 1%your TAN would reach 2.2% and your monthly payment would go to 520.39 euros. In this case, I would pay more 65.09 euros.
Also read: Euribor Simulator: The impact of rising interest rates on home loans
Prepare the budget to prevent the rise in interest rates
As a general rule, mortgage loan installments have a very significant weight in your family budget. Thus, in the current context, it is necessary make budget adjustmentsso that the rise in Euribor does not jeopardize your personal finances.
The first step to take is to calculate your effort rate. That is, the weight that the credits you have on hand have in your monthly budget. If you only have a home loan, your effort rate should not go beyond the 30%. If you have more credits, the total monthly charges must not exceed the 50%.
To gain some budgetary slack, you must review all your monthly expenses. Cut expenses considered superfluous, change habits at home and review all your contracts, from insurance to telecommunications.
If have several credits in hand, this may be the ideal time to educate yourself about credit consolidation. Consolidated credit can be a solution to gain some slack in your budget, as it combines all credits into one with a lower installment.
Furthermore, you can also renegotiate housing credit conditions with your bank. Also, find out about the possibility of transferring your loan to another institution.
Remember that the greater your financial slack, the smaller the impact of rising interest rates on your finances.
Also read: How to prevent interest rate hikes and save