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interest rate (still) resists

We have been talking a lot in recent articles about the possible rise in interest rates. With the rise in Euribor rates, one would expect an increase in interest rates. However, the interest rate on home loans (still) resists.

Euribor at 12 months rises 50%

Euribor rates have been rising in the last 3 months. In fact, the monthly average of the 12-month Euribor compared to March 2022 (-0.237%) was around 50% above the average recorded in January (-0.477%).

This is a substantial rise, sharpened in April. Although Euribor, in all terms, remained negative at the end of March (on a monthly average), it is no longer possible to think that the impact will not be felt interest paid on loans from Portuguese families.

Since the Euribor rate is the main reference for calculating interest on loans in Portugal (since the vast majority of these loans are contracted at a variable rate), it seems inevitable that we will see an increase in interest rates.

Do you still have doubts if you should hire your credit at a fixed or variable rate? Find out in this article.

Interest rates (still) resist

Looking at the data published monthly by INE, we see that the interest rate on mortgages for new contracts stood at 0.73% in Marcheven registering a slight decrease compared to the previous month.

Despite this, there is a movement of rise in interest rates on home loans since September last year.

The truth is the numbers do not yet show this increase in indexing. The (new) variable rate mortgage loan contracts take as a reference the average Euribor of the month prior to the time of signature.

In practice, it means that housing credit contracts signed in April 2022 will use the Euribor 12 months from March as a reference. That is, in reality the market will only see a more substantial increase in interest rates for new housing credit contracts, probably in Mayalready incorporating the average for the month of April which, however, was fixed at 0.013%, an already positive value.

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

Looking at the most recent history of interest rates applied in new housing credit contracts, and the evolution of the 12-month Euribor, we can calculate a spread market average.

At the end of March, this spread average was 1.1 percentage points, not showing up to date any upward movement.

The only way for new housing credit contracts not to become more expensive in the coming months will be through a descent of the spreads banks, as a way to cushion the impact of the increase in Euribor rates. However, I don’t think this will happen (at least substantially).

Therefore, in the face of a spread current average of 1.1 percentage points, and the increase in Euribor rates that has already been registered, I would say that until the end of the first half of this year, we may see an increase in the implicit rates of mortgage loans above 1%0.25 percentage points above current values.

So, if you are thinking of buying a home using credit, consider the purchase price and the financing value very well. First of all, try to incorporate interest rate increases for the next 12 to 18 months. Calculate the impact on your household budget of a 1 percentage point increase in the rate paid.

If you conclude that such an increase could jeopardize the payment of your installments, consider reducing the financing amount. Alternatively, look for a cheaper home.

Good deals (real estate)!

Also read: Real estate and inflation

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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