Have you heard that interest rates are going up, but don’t know how your mortgage payment will be affected? Would you like to simulate the impact that the rise in Euribor will have on your credit? Are you worried because you don’t know the maximum amount your monthly installment can reach? Next, we will answer these and other questions related to the rise in Euribor and the impact of its increase on mortgage loan installments.
Why will my credit installment increase?
If you have heard about the increase in Euribor rates, but you do not know what this increase is due to, know that this change is associated with rising inflation in the euro area. Since February 4th, Euribor rates began to rise more significantly, especially in 6 and 12 month deadlines. This rise became significant after the European Central Bank (ECB) publicly admit that interest rates this year could rise due to inflation figures in several European countries.
In case you didn’t know, Euribor is one of the main mortgage loan indicators in Portugal. In other words, we are talking about a reference rate, which reflects the average rate charged by European Union banks (HUH) with each other without guarantees.
If you have a home loan, you probably know that there is no Euribor rate, but several. This means that before proceeding with a credit, You can choose the Euribor term. That is, you can choose how often your interest rate is reviewed.
In practice, there are several deadlines: one week, one month, three months, six months and one year. However, in mortgage loans, the most common Euribor rates are the 3, 6 and 12 months. For example, if you opt for a 6-month Euribor, the applicable interest rate is reviewed every six months.
And in practice, if interest rates are going up, every 6 months you will have an increase in your monthly credit installment. This only happens because have a variable rate associated with your home loan agreement. With one fixed interest rate would pay the same amount until the end of your contract termregardless of whether Euribor goes up or not.
As inflation continues to rise at the moment, it is expected that the ECB will act and raise the benchmark interest rates in the Euro Zone. Ieraising interest rates is a way for the European Central Bank to control inflation. And in turn, this control affects the value of Euribor and its credit provision.
Also read: Euribor rates are rising. And now?
To understand what the impact on your credit provision will be with the rise in Euribor, you need to take into account the average Euribor value over the contracted period. For example, in April, the 6-month Euribor average was -0.3109%. However, at the value of Euribor you need add the percentage of your spread. The sum of these two values represents your TAN. if you have one spread of 1.4%, in April, your TAN would be 1.0891%.
Let’s go to practical examples to understand better. To simplify the math, let’s assume that your TAN is already at 1.1%. In a loan with an outstanding principal of 150,000 euros common term to 360 months (30 years old), will have approximately one installment of 489.38 euros.
If Euribor rises to 1% and with a spread of 1.4%, its TAN will have a value of 2.4%. And what impact does this rise in interest rates have on your credit provision? A significant increase in your monthly installment. That is, your monthly installment would become 584.91 euros. This means an increase of €95.53.
But what if interest rates continue to rise?
Taking the same example, let’s create three scenarios to understand the impact of a somewhat alarming rise in interest rates. The first with a rise in Euribor to two%. the second to 3%. And the third scenario with the increase in Euribor to 4%. If we take into account the same values mentioned above, that is, a spread of 1.4%, a outstanding capital of 150,000 euros common term to 30 yearsthe impact would be as follows:
In the first scenario, with a 3.4 TAN%, your current monthly installment of 489.38 euros (TAN of 1.1%) would change to 665.22 euros. That is, in a scenario with interest rates rising progressively over the long term, your monthly installment would suffer a increase of €175.84.
If the TAN reached the value of 4.4%the monthly installment of your credit would be at the value of 751.14 euros. This means that in relation to your current installment would pay another 261.76 euros.
already with a 5.4% TAN, the rise in interest would have an even more alarming impact on its finances, given its initial payment of 489.38 euros. And this why? Because with a TAN of 5.4% your monthly payment would rise to 842.30 euros. That is, there would be a increase of 352.92 euros.
How far can I increase my mortgage loan?
Although it is impossible to say a maximum value that Euribor will reach in the near future, if you take into account the values recorded in the past, it is more likely that the Euribor 6 months does not significantly exceed 5%. And this why? Because if you make an analysis of the values of the last 23 years, between the year 1999 and 2022, the Euribor only exceeded 5% in two years.
In August 2000, Euribor reached 5%, rising until October 31 of that year for the 5,202%. But before the end of the year 2000 this rate started to go down. After a period of significant decrease, in 2006 Euribor started to rise again. In 2008 this rate again reached maximum values, and in October of that year it reached the value of 5.448%. Since that month, the Euribor has been progressively decreasing, and in the end of 2015 entered negative values, and so it remained until the end of April 2022.
note: Analysis made to Euribor at 6 months through the Euribor Rates website.
So, if you base your analysis on the last 23 years, it is likely that the Euribor will not significantly exceed 5%. If your TAN is currently 1.1%, as in the example used here, with the increase in Euribor to 5%, you would have a TAN of 6.4%.
This means that in the worst case scenarioyour monthly installment would rise up to €938.26, that is, could pay 448.88 euros more compared to its current installment of 489.38 euros.
Not. The Euribor rate will not go from negative values to 5% suddenly. In fact, if we analyze the last historic rise in Euribor between 2005 and 2008 were 3 years of progressive rise. For example, in June 2005 Euribor was at 2,085%. On June 23, 2006, it reached 3,182%. On June 22, 2007 at 4,298%. And on June 25, 2008 it reached 5,125%. Approximately, there was an increase of 1% every year.
Therefore, taking into account that at the moment the 6-month Euribor is still at negative values, but close to reaching positive values, if the same scenario were repeated, only between 2027/2028 will the Euribor reach 5%. Of course, all these examples are what-if scenarios. However, they serve to realize that the European Central Bank acts progressively and will not change the Euribor from 0% to, for example, 4% in the next 6 months or 1 year.
Prepare your budget for the rise of the Euribor
For many families, mortgage payments have a very significant weight in their family budget. And so, with interest rates going up, it is necessary to carefully consider what to do in case, so that the Euribor rise does not jeopardize your personal finances.
Firstly, with interest rates rising progressively, this is not a time to contract new credits, but rather to optimize the management of the family budget. If you have several credits contracted, this is the ideal time to find out about the possibility of consolidate your credits.
After all, if you have a home loan, a car loan and credit cards, getting a consolidated credit can be one solution to take a break from your budget. This is because when you consolidate all credits into one, you get a single installment, with a lower interest rate globally, which allows for significant monthly savings.
If your home loan has outdated conditions compared to those currently offered by banks, it is advisable to renegotiate the conditions with the bank that granted your loan. But if the proposal does not meet your expectations, inquire about the possibility of transferring your home loan to another bank.
Finally, this is also a good time to review your insurance portfolio, since you may have covers that are no longer useful or even may be duplicated. Don’t forget to look at your family budget, iIdentify non-essential expenses and make adjustments as needed.
Remember that the greater your financial slack, the smaller the impact of a considerable increase in your mortgage payment.
Also read: How to prepare for interest rate hikes on home loans?