The current situation has led to the rising inflation all over the world. And with the rise in the rate of inflation, central banks have positioned themselves in the same direction, raising interest rates. In Europe, the European Central Bank said earlier this year that interest rates were likely to rise. So, since that period, we have seen Euribor rates rising progressively. As a result of this rise, those who have credit should be concerned with understanding the impact of the rise in interest rates on their monthly installment.
If you are in this situation, know that in order to determine the real impact of the rise in interest rates on your home payment, you will have to do the math or use a Euribor simulator.
Next, we’ll show you how you can understand the impact of rising interest rates on home loans.
However, if you use a Euribor simulator, you can foresee different scenarios. For example, you can simulate the rise of Euribor for the values predicted by the financial market for the Eurozone, which are around 1% and 1.5%. If you want to have an idea of the value of your credit provision in the worst possible scenario, like what happened in last big recession in 2008, can do a simulation with 5% Euribor.
Shall we go to examples?
Read also: Prepare for the rise of Euribor
The impact of rising interest rates on home loans in the near future
While many people are alarmed by rising interest rates, know that your monthly credit repayment will never increase dramatically overnight. After all, the European Central Bank works progressively.
And what does this mean in practice? That when your installment is reviewed (according to the term of the Euribor rate you contracted), it will be applied to Euribor update, being later added to the value of your spread. These two components, (Euribor rate + Spread) give rise to the value of your TAN (Nominal Annual Rate), that is, at the interest rate on your home loan.
As since 2015 the values of Euribor rates are negative, it is normal that you feel a slight increase in your installment at the next review of your credit. After all, apart from the 12-month Euribor rate, which is already at positive values, the other maturities are increasingly approaching 0%. And as such, all these small climbs will have their impact. But let’s go to concrete examples so that you can better understand the values that are at stake.
To get an idea of the impact of Euribor’s evolution, if you have a credit of 120 thousand euros, with a spread of 1.2% in which there is still to settle 300 installmentsyes, would pay 440.56 euros per month. This value takes into account a 6-month Euribor rate with the March value (-0.417%) and a TAN of 0.783%.
Now, if in the next review, the Euribor at 6 months reached 0%its TAN would rise to 1.2% and its credit provision for 463.19 euros. That is, its performance suffers a increase of 22.63 euros.
If we opt for a scenario with a more significant rise in Euribor, as for example 1%your TAN would reach 2.2% and your monthly payment would go to 520.39 euros. In this case, I would pay more 79.83 euros.
Also read: My credit performance will go up: When should the alarms sound?
I don’t know how to calculate the rise in interest rates. Is there a Euribor simulator?
Yup. At Doutor Finanças we have developed a simulator of the variation of Euribor in Mortgage Credit that allows you to have an idea of how your monthly installment will be affected by the increase in interest rates. However, in order for the values to be as close as possible to the real ones, you need to enter the following data in the simulator:
- The term of your Euribor Rate: 3, 6 or 12 months
- The month your installment will change after the review
- Value of your spread
- Amount of debt capital
- Number of missing installments of your credit
- And finally, select the value of the Euribor rate you want to simulate.
Let’s use the Euribor simulator to understand how much would be paid if the Euribor 6 months reached 1.5%O maximum that the financial market predicts for the Eurozone in the near future, but also alarming scenarios such as 3% or even 5%.
Using the same example of an outstanding principal of 120 thousand euros, with 300 installments to be paid, if it had a spread of 1.2% and the Euribor rose to 1.5%, your monthly installment would go from 440.56 euros to 550.51 euros. Even if this increase took countless months or years to occur, it is impossible to determine a time period for this eventual rise. However, we would be talking about a progressive increase, which in the end would represent 109.95 euros less in your budget every month.
In a scenario where Euribor reached the 3%the monthly installment would increase toat €646.73. That is, a total increase in 206.17 euros. Finally, if you reach the value of 5%as in the period of the last major financial crisis in 2008, its provision could reach 787.90 euros.
Also read: Euribor Rise: How much can you increase your home loan?
Use Euribor simulator, but don’t wait for interest rates to rise
We live in an economically uncertain period, withIt is impossible to accurately predict what the Euribor value will be in 6 months, 1 or 2 years. And as such, the first step is to accept that your credit score will go up. Then, try to understand the impact of rising interest rates through the Euribor simulator. See what is the increase in your installment with Euribor a 0%, 0.5, 1% or even 1.5%.
After having a notion of the impact of interest on your credit provision, it’s time to start acting. And this why? because it is likely that have to make certain adjustments so as not to jeopardize its financial stability.
For example, as we are talking about a direct increase in your mortgage loan installment, you can review the conditions of your loan. So, talk to the bank where you got the financing and see what you can do. That is, try to understand if there is scope for the bank to lower its credit spread.
Today, most banks apply minimum spreads of 1%. However, in some banking entities, they already apply in some operations spreads minimum of 0.85%. It all depends on the type of financing and the conditions of each holder. But if you manage to reduce your spread, you will get a financial break and will not feel, for now, a significant impact from the rise in interest rates.
In addition to spread of housing credit, see whether it is worth subscribing to mandatory home loan insurance (life insurance and multi-risk insurance) with another institution. Sometimes, this small change significantly lowers the amount you pay for these two insurances. However, be aware that when changing insurance to another insurer, it is more normal for your credit spread to rise. So, you’ll need to do the math and see if this change pays off even with a spread penalty.
Have more than one credit? Find out about consolidated credit
If you have more than one loan in addition to your home loan, such as a car credit, credit cards or another personal credit, know that you can save significant value by consolidating all your credit installments into one.
Contrary to what many people think, consolidated credit is not just for the over-indebted. Basically, those who want to consolidate their credits are looking for a savings solution. That is, you do not need to be in default to apply for a consolidated credit. You just have to meet the necessary conditions and want to gain some financial slack in your budget.
And why is it possible to save by merging all credits into one? Why this financial solution allows for better conditions, then the consolidated credit interest rategeneral rule, is lower than average interest rates on many consumer credits, as is the case with credit cards. And as such, when you have a single monthly installment, it is very likely that the total amount will be lower than what you paid previously.
Is it worth switching to a flat rate?
It all depends on your goals. In case you have a credit indexed to a Euribor ratewill alwaysand deal with the fluctuation of Euribor. When changing your credit agreement to a fixed rate, you no longer worry about whether interest rates are going up or not. That is, this type of loan offers a greater stability to its holders. However, at the beginning, the charge for your credit provision will be higher than that of a variable rate.
In addition, if you want to sell your property or repay the debt, be aware that you will have to pay an early repayment fee. This commission is higher in credit agreements with a fixed rate, having to pay 2% of the capital repaid. In the case of contracts associated with a tvariable interest rate this fee is 0.5% of the capital repaid.
So take these factors into consideration. Weigh in the balance if you prefer a solution that is more affordable today, but uncertain in the long term. Or if it is better to opt for a higher installment, at least at the beginning, but ensure that this value does not undergo any type of change until the end of the contract.
Also read: Should I switch to fixed rate mortgage?
Don’t forget that these are just a few solutions to reduce the impact of the Euribor rise on your budget. The most important thing is that you know that these are times that require some thought and an active search for alternatives for Don’t put your family budget at risk.