Since inflationary trends became a reality on a worldwide level accelerated by the effects of the armed conflict between Russia and Ukraine, the European Central Bank (ECB) put into operation deflationary monetary policies. Therefore, although in the negative for years, variable rate mortgages’ main reference rate rose significantly translating into more expensive variable rate mortgages. That reference rate is EURIBOR, or Euro Interbank Offered Rate, and we want to explain in today’s post exactly what it is, how it is calculated, and how it affects you if you bought property with mortgage financing.
What is EURIBOR?
As mentioned before, EURIBOR is a reference rate used in Europe’s interbank market. It is used as a reference rate for short-term loans between euro area banks. EURIBOR is published daily and reflects interest rates’ weighted average for a group of European banks willing to lend money amongst themselves.
How is EURIBOR calculated?
EURIBOR’s calculation is based upon rates provided by a panel of selected banks. Extreme figures are excluded and an average is calculated from the remaining figures to determine EURIBOR’s daily rate. Different EURIBOR terms exist: 1 month, 3 months, 6 months, 12 months, etc.
How can it affect property buyers with a mortgage?
EURIBOR plays a fundamental role for those buyers who signed a mortgage in Spain. Many mortgages in Spain, as in other parts of the euro area, are linked to EURIBOR. It is common practice that a mortgage’s interest rate is settled annually according to EURIBOR plus a margin, known as additional margin established by your bank.
When EURIBOR rises, mortgage instalments linked to this rate tend to do so too, which can affect borrowers by increasing their amount of debt. On the contrary, if EURIBOR falls, payments can decrease and provide borrowers financial relief.
We must stress the connection between EURIBOR and mortgages can vary according to each mortgage contract’s specific terms. Some may have specific clauses that limit the impact of EURIBOR’s fluctuations on interest rates or monthly payments. Furthermore, different types of mortgages exist, some of which may have fixed interest rates instead of variable ones linked to EURIBOR.
If you ever doubt when signing a mortgage, remember relying on professional advice can save you a lot of money and headaches. Tecnotramit has been leading the way in this sector for many years and is a reference for our clients. We are at your service.