The Euribor is a key financial instrument to determine the economic evolution of a country and is used throughout the Euro zone. This is the main reference used by banks to calculate the interest rate applied to their loans and this is true since the single currency exists.
Financial analysts, administration, banking entities, private citizens … all affect the course of the Euribor and for this reason it is particularly important to know how your quote is going. At present, the Euribor has been slightly bullish for several months but is this good news?
The rise of the Euribor
Last January the Euribor closed at -0.116%, a rise for the tenth consecutive month. In December, on the other hand, it closed at -0.129%. These values imply that mortgages of 120,000 euros to 20 years with a 1% Euribor differential with revision will be increased by 44.46 euros in their annual quota. The average amount of mortgages is variable in Spain, since it ranges from 179,359 euros in Madrid, the highest amount of all the autonomous communities, to 76,394 euros in Extremadura, the lowest figure.
Regarding the impact of the recent euribor by regions, Madrid and the Balearic Islands are those that have noticed more the rise of the euribor in January, because it is where the mortgages will experience greater growth, 6 euros per month on average in Madrid and 5.4 euros in the Balearics.
The Euribor has been below 0% for two years and analysts point out that this is mainly due to the European Central Bank policy, which has as its main objective the recovery in the euro zone. However, experts warn that monetary normalization will have to come at some point.
If we ask, in general terms, if this upward trend is positive, the answer has two sides: it is positive for banks and negative for mortgages. People who have mortgages will see how they are revised up in this period while those who are going to sign new mortgages will also suffer from the rising trend of the Euribor.
The president of the European Central Bank has recently recommended that banks be prudent in interest rate hikes but there is no evidence that these entities are going to follow such advice.
All experts point out that there is no evidence pointing to the breaking of the uptrend in the near future. If the inflation levels are close to 2% in our country, it is very likely that the Euribor will rise even more. In this way, the predictions clearly point to the year ending in positive.
The calculation of the Euribor
For those who are not familiar with the Euribor, it may be interesting to know how this indicator is calculated. The European Banking Federation, which brings together all banking and credit institutions in the euro zone, is the one who makes this calculation. For this purpose, each reference bank sends its current interest rates daily (in working days). The value of the Euribor is obtained by eliminating the highest 15% and the lowest 15% of the collected interest rates and making the arithmetic mean of the rest of the values. The result is the value closest to the average and consists of three decimals.
Ratio of euribor with mortgages
As we have already mentioned, mortgages and their interest rates are intimately related to the ups and downs of the Euribor. The rates of mortgages at a variable interest rate increase when the Euribor grows and fall when the Euribor also does so.
Mortgages of variable interest are the most common in Spain although there are other types: fixed and mixed interest (fixed interest during the first years and variable the rest).
In mortgages with variable interest, the differential applied to Euribor must be taken into account. The differential of a mortgage is the fixed percentage that is added to the Euribor.
This percentage constitutes for the bank the interest that it obtains as remuneration when it grants the mortgage.
Also published on Medium.