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How far can interest rates go?

A few days ago, the European Central Bank (ECB) raised its policy rate by 75 basis points. A strong response to the risk of inflation led the ECB to take this decisionputting its interest rate at 1.25%.

ECB key rates have long been at 0%. This year alone, we have already registered two increases, now to 1.25%. Looking at the history of the last 22 years, we see that since 2011 there have been no rates above 1%while it is also possible to recall rates of 5% in more distant times:

Obviously, this monetary policy has direct effects on the Euribor rates that serve as a reference for most loans in Portugal, namely mortgage loans. But after all, How far can interest rates go?

Also read: A house to live in or to surrender?

How far can interest rates go?

In April of this year, despite statements by the governor of the ECB that account for gradual increases and only in the third quarter of this yearalready warned in an article here in Doutor Finanças about market expectations.

For some months now, the markets have been anticipating this (and other subsequent) decision to raise interest rates and therefore this most recent increase of 75 basis points shouldn’t come as a surprise.

Since the Euribor rate is itself a rate that reflects the future – or, in other words, it reflects the expectation of banks in the European space regarding a future value of interest rates – it is possible to observe what values ​​these rates are currently at.

At the time of writing this article, and according to data taken from the website euribor-rates.eu, the 6-month Euribor was at 1.442% while the 12-month index was quoted at 2.015%. The longer the term, the higher the expectation for the Euribor value.

According to Chatham Financial, the current market expectation regarding the 6-month Euribor value, for March 2023, is that it will reach 2.54% and then stabilize around that value. In the same article, from April of this year, he mentioned that the market was quoting the Euribor at 6 months at 1.6% in October 2023. Just 5 months later, we already have a significant difference of 100 basis points in the expectations generated by the market and for a period 6 months earlier than initially expected.

In short, what the market is telling us is the following: interest rates higher and faster than initially expected.

Also read: Debt in real estate

What effects do you feel in the provision of a home loan?

Assuming a mortgage loan of 150,000 euros, 30 years and a spread of 1.25 percentage points (Euribor rate with floor 0%), the impact on the monthly installment is significant, if not, let’s see:

Exactly one year ago, and assuming a floor of 0% for the index (that is, a value above the one actually recorded), the bank installment would be 20% lower than it is currently. And given the future expectations of the market, it has the possibility to raise another 90 euros per month. In just 18 months, we are talking about an impact of almost 200 euros monthly in bank installments.

Therefore, if you currently have a home loan, do your math very well to estimate future impacts of increases in the index. If you are thinking of buying a home using credit, think carefully about the amount of financing and the purchase price of the home.

Good deals (real estate)!

Also read: Housing: buy or wait?

Gonçalo Nascimento Rodrigues is a Real Estate Finance Consultant, having worked in companies such as Ernst & Young, Colliers International and Essentia. He is Coordinator and Lecturer in a Postgraduate Program in Real Estate Investments at ISCTE Executive Education. Additionally, he performs consultancy activities, providing advisory services to real estate investment. He holds a master’s degree in Real Estate Management and Finance and a master’s degree in Finance, both from ISCTE Business School, as well as a degree in Business Management from Universidade Católica Portuguesa. He is the author of the Out of the Box blog.

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