HomeFINANCEHighest interest rate ever. What does it mean for my credit?

Highest interest rate ever. What does it mean for my credit?

The European Central Bank (ECB) raised interest rates once again to the Euro Zone, after having announced, in July, the first increase in 11 years.

This time, and as anticipated by the market, it was a record increase of 75 basis pointswhich raised the interest rate applicable to the main refinancing operations from 0.5% to 1.25%, the rate applicable to the marginal lending facility from 0.75% to 1.5% and the rate on deposits of 0% to 0.75%.

This decision by the Eurozone central bank comes in response to the ascent inflation, which began in the context of recovery from the global crisis caused by the covid-19 pandemic, and which was accentuated with the conflict between Russia and Ukraine and the energy crisis. The ECB’s objective is to keep inflation under control at close to 2%.

However, price growth in the single currency region is far above this level. In August, inflation reached 9.1%, and prospects are now even less encouraging: the ECB expects that, this year, price growth will be 8.1% (the June estimate pointed to 6.8%) and that, in 2023, it will be 5.5% (against 3.5% in previous projection). It is only in 2024 that the monetary authority sees inflation approaching the target, at 2.3%.

New raises in sight?

It is the behavior of the economy that will dictate the evolution of interest rates. But, given the current scenario, we can count on further increases in the coming months. This was admitted by ECB President Christine Lagarde, who says that we are still “a long way from the interest rates necessary to bring inflation back to the 2% target”.

According to the person in charge, three or four more increases should be needed in the next meetings, which will place the reference interest above 2%.

There are analysts who believe that the economic crisis will put a brake on price growth, leading the ECB to reverse the increase in interest rates, while others anticipate a more difficult control of inflation, which will force the central bank to put interest rates in the 4% range. In the next years.

Read also: Brief history of Euribor: Guide to understand what’s coming

Credit cost rises again

This rise in interest rates has a direct impact on the many families, as it will increase the cost of housing credit. This is because Euribor – which defines the interest to be paid to the bank, together with the spread – is influenced by this worsening, and should continue to rise in the near future.

Remember that Euribor rates, which had been negative since 2015, started to rise in February, when it was already anticipated that the ECB would reverse its policy and raise interest rates to try to control price growth.

Since then, Euribor has reached maximums in all timeframes, making the interest bill on loans more expensive. If you are paying your house to the bank, you can already prepare for further increases.

Also read: Euribor: should I choose 3, 6 or 12 months?

How far can you increase your home loan?

Considering the ECB’s current projection of three or four more rate hikes in the next meetings, the reference rate will certainly be above 2% in the first quarter of next year. Euribor rates, which are based on the average interest charged by Eurozone banks on loans they make to each other, will follow this increase.

But let’s go to concrete examples: a family with a 20-year mortgage loan indexed to Euribor for 6 months, in the amount of 200 thousand euros and a spread of 1.2%, pays the bank today 980 euros monthly (assuming revision in August).

With interest at 2%, that same family will see the monthly payment worsen to 1,129 euros, that is, 149 euros more than currently.

Assuming a more extreme scenario in which the ECB is more aggressive in its response to inflation, and Euribor reaches 5% (as occurred in 2000 and 2008), the installment would rise to 1,456 euros476 euros more than today.

Although it is not possible to predict the evolution of Euribor rates, we know that the central bank has prepared further increases in key interest rates, and the financial markets themselves anticipate a rise to a level close to 2.5% (taking into account the swap to 5 years, which is already approaching this level).

To make your calculations easier, use the Euribor variation simulator in home loans, where you can test possible Euribor increases and see what impact they will have on your credit.

Also read: With Euribor rising, should I opt for a mixed rate?

Benefits to go up: what to do?

If you have equity that allows it, it is the right time to pay off your home loan. As we have seen, interest rates will continue to rise and, although the yield on deposits will also increase, it is not advantageous to have money parked in the bank.

You can choose reduce your monthly installment or shorten the term of the loan, saving significantly on the interest bill throughout the contract.

Use the credit installment simulator after early repayment to get an idea of ​​the monthly amount you will pay the bank after repaying the credit.

If you are unable to prepay your credit, can and should review the conditions of your contractincluding spreadassociated products and other charges.

Also read: Rise of Euribor: is it the right time to amortize home loans?

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  • #Mortgage loans,
  • #euribor,
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