HomeFINANCEHow much can you increase your home loan?

How much can you increase your home loan?

The rise in the rate of inflation, accentuated by Russia’s invasion of Ukraine, set off some alarms, in particular with central banks. In the US, the Federal Reserve (Fed) has started to raise interest rates. In the Eurozone, the European Central Bank (ECB) has already given signs that it will also increase interest rates.

This context is already causing a rise in Euribor rates, which has direct implications for the cost of credit. The question, at this moment, is not whether the provision of housing credit will increase, but how much it can go up.

In this sense, Doutor Finanças has developed a simulator that allows understanding the impact of the rise in Euribor rates for each case. Simulate your situation:

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Simulation result

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Enter values ​​above to see simulation results

Current Simulation
Euribor month to apply {[{ nomes_meses[result.mes_base.mes-1] }]}/{[{result.mes_base.ano}]} {[{ nomes_meses[result.mes_base.mes-1] }]}/{[{result.mes_base.ano}]}
Euribor to apply {[{ result.euribor | number:3 }]}% {[{ result.euribor_var | number:3 }]}%
TAN {[{ result.tan | number: 3 }]}% {[{ result.tan_var | number:3 }]}%
Fees {[{ result.juros | currency: ‘€’ }]} {[{ result.juros_var | currency: ‘€’ }]}
capital {[{ result.capital | currency: ‘€’ }]} {[{ result.capital_var | currency: ‘€’ }]}
installment {[{ result.prestacao | currency: ‘€’ }]} {[{ result.prestacao_var | currency: ‘€’ }]}

Read also: Prepare for the rise of Euribor

Euribor rates move towards positive ground

Euribor rates have been trading at negative values ​​since 2015following the interest rate cuts made by the ECB, after the financial crisis that devastated the world.

This scenario seems to be about to change. Since February, after inflation data pointed to the possible need for the ECB to act, Euribor rates began to rise. The increase is being slight, but the trend is up.

How is Euribor calculated and what impact does it have on home loans?

This environment thickened after Russia invaded Ukraine and the Fed started raising interest rates in the US. The ECB also opened the door to interest rate hikes.

In this context, the 12-month Euribor rate has already risen even to positive values. And the monthly average for April (which is the reference value for housing loans indexed to the 12-month Euribor rate), rose to 0.0131%. At six- and three-month rates remain negative, but are approaching zero.

To have an idea of ​​the impact of the evolution of Euribor, a person with a loan of 100 thousand euros, with a spread of 1.2% and with 300 installments still to be paid, he will pay 367.13 euros per month, taking into account the Euribor rate in six months of March (-0.417%). If the Euribor average increases to 0%, this installment increases by almost 19 euros to 385.99 euros.

Also read: Euribor rates are rising. And now?

How far can the benefit increase?

Nobody can predict how big the rise in Euribor rates will betherefore, it is not possible to know in advance the maximum value of the installment.

We were able to contextualize. Looking at history, the data reveal that In the last 20 years, Euribor rates have twice exceeded 5% (in 2000 and in 2008). These were the periods with the peaks.

As it is impossible to anticipate how far interest rates can rise, it is important to note that the ECB acts moderately. That is, it decides to raise interest rates progressively. It is only at unusual times that decisions are more aggressive (as happened in the 2008 financial crisis).

And it is this perspective that is being anticipated by the financial markets, which are predicting that in the coming years, interest rates in the Eurozone will remain close to 1% and 1.5%.

Taking the example above, a loan of 100 thousand euros, with the conditions described above and a Euribor of 1%, corresponds to an installment of 433.66 euros, 66.5 euros more than the current value.

If we extrapolate this exercise and, for the same case, simulate a Euribor of 5%, we will have an installment of 656.58 euros, that is, almost 290 euros more than the current one.

It should be noted that this last scenario is unlikely to happen in the next few years. As mentioned above, in the last 20 years, there were two periods in which the Euribor rate negotiated around 5%. And they corresponded to moments of economic growth.

The current economic moment is one of high uncertainty, so the ECB will take this into account before moving forward with interest rate hikes.

Even so, it will be crucial to understand what can happen to your home loan in a period of rising interest rates. And, if applicable, also understand the adjustments you may have to make so as not to risk your financial stability.

Also read: My credit performance will go up: When should the alarms sound?

What can I do to reduce the impact of the ascent?

There are several ways to prepare for the anticipated interest rate hike. You can review the conditions of your loan with your bank or you can look for alternatives. The important thing is that don’t wait for the climb and act as quickly as possible.

One of the first things you should do is contact your bank and see what can be done. It is possible to download the spread associated with your credit? To get an idea, there are banks that are applying spreads minimum of 0.85%. Do you know which one is yours?

The review of your loan conditions can dictate the reduction of monthly (and total) charges, so you should understand if there is room for this.

If your credit is indexed to a Euribor rate, consider the possibility of having the credit agreement associated with a fixed rate. This will protect you from interest rate fluctuations. But be careful, in the initial moment you will always have a greater burden with your provision. In this case, what guarantee is stability.

Beyond the spread and the indexer must review the insurance associated with the credit agreement. It has multi-risk insurance and life insurance. The subscription of these two insurances is a criterion for banks to finance the purchase of the housesince they act as a protection for the customer and the bank itself.

After contacting your bank, if the conditions presented to you are not sufficient, you can always look for alternatives. Consult other institutions and see what they can offer you.

You can also, without changing the conditions of your credit, understand if underwriting insurance with another institution (other than your bank) can make a difference. It is possible that the spread your home loan will go up if you choose to have insurance with another entity, but often the savings pay off (and the coverage can even be more comprehensive).

There are several ways to try to reduce the impact of the Euribor increase on your budget. Do the math, look for alternatives and don’t wait for interest rates to rise to levels that could jeopardize your budget.

(Correction: In the first example of the evolution of the installment, the increase in Euribor to 1% was mentioned, when in fact the increase was only exemplified to 0%)

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