Mortgage interest rates rose… Now what???
Euribor is already positive and the monthly installment of mortgage loans will go up. I outline scenarios and explain the main consequences…
Interest rates have been negative in recent years, allowing consumers to access credit at less cost and keep demand high. However, the recent rise in inflation in Europe has rekindled fears of an interest rate inflection, which began an upward trajectory in recent months and was accentuated with the outbreak of the military conflict in Eastern Europe. Five years later, Euribor reached positive indices on April 12. I have long predicted that this would happen. I just needed to know when….
WHO DECIDES IF THE INTEREST RATE GOES UP OR DOWN???…
At each monthly meeting of the European Central Bank, a decision can be made whether to maintain or change the so-called key rate, which the ECB charges banks for lending them money. A review of this rate influences all credit agreements practiced between banking institutions, which define the Euribor. The last review took place this past Thursday, the 8th of September, when the key rate was set at 1.25 percent. This dynamic is in addition to that of the market and expectations regarding the evolution of economic indicators also influence the Euribor rates set by European banks, seeking to anticipate the next steps of monetary policy. In the end, these are the rates that directly influence variable rate credit agreements.
WHY HAS INFLATION BEEN UP???...
Several factors have contributed to this scenario. One of them is the increase in the price of oil and energy in general. The military conflict in Ukraine has made a strong contribution in this regard. On the other hand, the expansionary monetary policies of recent years have caused excess liquidity in the market, which did not count on the emergence of a pandemic in 2020, and with its immense impact on global production and distribution chains. Inflation has, in fact, been rising. Average inflation in the euro zone reached 8.9 percent in July. In Portugal, the inflation rate was 9.4 percent.
IS IT INEVITABLE TO CORRECT THE RISE OF INFLATION WITH THE RISE OF THE INTEREST RATE???…
This is the classic response to inflation scenarios, but a very significant variation could have harmful consequences in the current economic context. The indebtedness of countries, as well as families, is at very high levels and the economic recovery of companies is still very weak, not least because the pandemic has caused serious constraints on the activity of many institutions in the last two years. On the other hand, the rise in inflation, which has caused a general increase in prices, is not being accompanied by wages, reducing the purchasing power of consumers. An upward correction in the interest rate has become inevitable and has been happening quickly. This movement was anticipated in the financial markets during the last few months, influencing the Euribor.
WILL EURIBOR GO UP???…
Interest rates are reinforcing their upward trajectory, which began in recent months. Currently, the 12-month Euribor has already reached values close to 2%, as well as the 6-month Euribor has already exceeded 1 percent. I consider an increase in these values plausible, at least until the end of the year.
WILL MY MORTGAGE PAYMENTS GO UP???...
Yes, as the installments are reviewed in the coming months, depending on whether the contract has been negotiated with Euribor at 3, 6 or 12 months. Here are some scenarios that I simulated for consumers with mortgage loan contracts with a 1% SPREAD and 6-month Euribor.
100 thousand euros at 30 years…
Average installment with 1% Euribor: €369.62
Average installment with 2% Euribor: €421.60
150 thousand euros at 30 years…
Average installment with 1% Euribor: €554.43
Average installment with 2% Euribor: €632.41
200 thousand euros at 30 years…
Average installment with 1% Euribor: €739.24
Average installment with 2% Euribor: €843.21
HOW CAN I PREPARE FOR AN INTEREST RATE RISE???…
Based on the scenarios presented above, run simulations for your case and envision the impact of a possible rise in interest rates on your family budget. Remember that loan installments must not exceed 35% of monthly disposable income. If it exceeds this reference, it is time to consider renegotiating the credit conditions.
If your credit agreement provides for a spread greater than 2%, renegotiate, as you will easily find better offers. Compare proposals through a loan broker, choosing the lowest. If the bank where you have the credit does not want to follow the best proposal from the competition, consider transferring the credit to another bank… Reach out to me and I will connect you with our trusted loan Broker to find the best solution for you.
As an alternative to reducing the spread, consider increasing the loan term or establishing a grace period. Both options provide relief from the monthly charge, but may incur an additional cost at the end of the contract.
To be immune to interest rate fluctuations, you can choose to hire a fixed rate. However, currently, this option still involves paying more than for variable rate loans. But in case the family budget can no longer withstand large variations with the installment, it can be an alternative to take into account, in these uncertain times. If you choose to keep the variable rate, it is recommended that you follow the evolution of the market and adjust the family budget to the news.
Consider amortizing the credit, if the net interest rate of the financial application where you have the savings invested is lower than the nominal interest rate of housing credit.
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