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Rise in Euribor Signals End to Drop in Mortgage Payments

11 September 2018

The recent rise in the 12-month Euribor rate has signalled the end of a cycle of declining mortgage payment instalments for variable rate loans.

Any increase in rates will be gradual, but economists have no doubt: the trend of declining mortgage interest payments has come to an end. First, loans indexed to the three and six month Euribor saw increases, and now, it is the turn of loans linked to the 12-month rate.

“The monthly average for the 12-month Euribor started to rise slightly after reaching a low of -0.191% in March 2018, compared to -0.169% in August. Considering the current economic scenario, the trend is expected to continue in the coming months,” said Nuno Rico, an economist at Deco Proteste.

“The rise will already begin to be felt in the next revision of the instalments for loans indexed to this rate. In contracts with a variable rate indexed to 12-month Euribor, the instalment is reviewed annually, taking into account the date of the contract,” explained the economist of Deco Proteste. “In the next review, contracts with this rate will see payments rise,” said Nuno Rico.

The upward trend has begun, but as yet it is not highly significant, considering that Euribor is still in negative territory. The 12-month Euribor is far from its level of 5%, a decade ago. “The rate has hit bottom. It will continue to rise, but we do not expect rapid increases,” Filipe Garcia, an economist at IMF Financial Markets Information, explained. “There will be an increase in monthly mortgage payments for homes, but it will not be an accelerated rise,” he said.

Consumers have benefited in recent years from a decline in their mortgage payments to Portugal’s banks, due to the successive fall in interest rates, which reached historic lows below zero. The 12-month index has been rising since February, and, in August, it saw the highest increase in the last four years in monthly terms, going from -0.179% to -0.169%.

The average for August is more than 0.020 points higher than in February. “This is will not impact people’s payments. I also do not expect that payments in 2019″ will garner much attention,” the same economist said. In Portugal, only about 10% of the housing loan contracts use the 12-month Euribor as an index.

In practice, for a 30-year loan of 150,000 euros, with a 1% spread, the value of the monthly payment, taking into account the average Euribor in August, would be 470.9 euros. If the average rate rises, for example, up to 0.331%, the instalment will reach 505.6 euros per month, according to a simulation by Deco Protest.

A new cycle for interest rates

Euribor’s reversal is linked to the normalisation of monetary policy by the European Central Bank (ECB). The bank is planning on ending its program of quantitative easing. On the other hand, the demand for credit is also up this year. Markets are pricing in the probability that the ECB will raise the benchmark rate from zero to 0.25% by the end of 2019. Economists anticipate that by September of next year the institution led by Mário Draghi sill also raise the current deposit rate of -0.4% to -0.2%. The increases are expected to occur before the ECB’s president ends his term in October 2019.

However, there are risks on the horizon, such as the tariffs levied by the United States, which may have some economic implications, in addition to the political situation in Italy. The ECB is expected to confirm this week that it will maintain its policy of reducing its bond purchases starting in October and concluding the program by the end of this year. It should also signal that it will keep rates at their current level at least until the end of the summer of 2019, according to Bloomberg.

Rising interest rates are a threat to more indebted economies such as Portugal’s. However, economists believe that mortgage holders will only really be affected when the central bank benchmark rates begin to rise.

Original Story: Dinheiro Vivo – Elisabete Tavares

Photo: DR

Translation: Richard Turner