In recent years, we have been hearing daily discussions about Euribor. On television, news about this topic is frequent and consistently holds a prominent place in the news broadcasts. So, what is the Euribor rate? Do you know why your monthly mortgage instalment varies? Clarify all your doubts about this benchmark, understand what the Euribor rate is, its history, the reason for its existence, and how its future may influence our lives. If you are considering buying a house, it is crucial to comprehend the role of Euribor in home loans.

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When was Euribor created?

Euribor became a part of Europeans' lives on the same day the European Union's single currency was established, on January 1, 1999. The acronym Euribor, derived from the European Interbank Offered Rate, is the most widely used. This rate was introduced to standardize interbank interest rates in the Eurozone as Europe began using a common currency. Before the advent of Euribor, Portugal used the Lisbor rate, which coexisted with Euribor until the adoption of the Euro as the country's single currency.

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What is the Euribor rate?

To comprehend the Euribor rate, it's crucial to understand that banks lend money to each other, employing a specific rate for this transaction. The Euribor is nothing more than an indicator of the interest rate for these interbank loans in the Eurozone. This benchmark is set daily by the European Banking Federation and is derived from the average interest rates provided by the 52 largest banks in the Eurozone.

After the 52 most relevant banking institutions in the Eurozone share their data, the Euribor rate is calculated as follows: 15% of the lowest rates and 15% of the highest rates are excluded, and the result is obtained. This rate is announced daily at exactly 10:00 am. The only Portuguese bank to be part of the group of the 52 most relevant institutions in Europe is Caixa Geral de Depósitos.

The European Central Bank (ECB) holds the greatest influence over interbank loans. This institution coordinates the planning of banks in the Eurozone, adopting measures that tend to be replicated by other banks. The interest rates decrease when the ECB opts for promoting liquidity and economic dynamism. This trend persisted for six years and three months with the 12-month Euribor rate; only at the end of April 2022 did the rate close the month in positive territory, reaching 0.005%. In 2015, we witnessed rates fall into negative territory. A result of the ECB's expansionary strategy to revitalise the economy after the 2008 crisis.

In the presence of inflation, i.e., a rise in prices, the ECB tends to reduce liquidity, causing an increase in interest rates. Since 2022, we have been grappling with inflation, a year in which it reached 9.2% in the European Union countries, according to Eurostat.

Several factors contributed to inflation, with notable ones including the pandemic, the war in Ukraine, and the recent conflict between Palestine and Israel.

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How many Euribor rates are there?

The Euribor is reviewed based on different terms; thus, the maturity of a loan is nothing more than the period for the revision of its instalment. The monthly payment can increase or decrease every week, one month, three months, six months, or twelve months (with the latter three being the most common in housing loans). In Portugal, the majority of loans are indexed to the six-month Euribor.

When acquiring a housing loan, one of the first decisions is to choose between a variable or fixed interest rate. In the latter option, the monthly instalment remains constant, regardless of the ECB deciding to increase rates to curb inflation. The fixed-rate offers a sense of security, as you always know how much you will pay at the end of the month. Before the inflation of 2022, the fixed rate had a great impact on family budgets; now, the values ​​of instalments between fixed and variable rates are very similar.

It is crucial for those with a variable-rate housing loan to be well-informed. Follow the Euribor values daily on this website.

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Are there other benchmarks besides Euribor?

Reference interest rates play a crucial role in various financial markets worldwide. Euribor has been in effect in the Eurozone since 1999, as mentioned earlier. In 2019, there was a discussion about a new interest rate to replace Euribor, aiming for greater transparency than the former. Ester, an acronym for "Euro Short-Term Rate," was proposed to reduce the possibility of manipulation and provide a more accurate reflection of market conditions.  This happened because Euribor is based on estimated values that banks report, believing they will be applied when borrowing from other banks.

Ester was the new benchmark interest rate that replaced EONIA on January 3, 2022. This new rate has more realistic calculations, aiming to avoid manipulation scandals similar to those during the 2008 crisis. Ester is a short-term interest rate based on confidential statistical information about individual transactions in the European money market, involving deposits from 50 institutions (not limited to banks) reporting to the ECB. So far, these changes will not impact the financial solutions and products offered by banks in Portugal, as they continue to use Euribor as the reference rate.

Buying a house with a mortgage?

It's always a crucial moment in anyone's life, a milestone many aspire to achieve. If you need a mortgage to buy a house, do it consciously and informed.

Don't forego the assistance of a real estate consultant when choosing your home. Ask several questions, and if the chosen house is second-hand, inquire about the sellers' intention to sell. Remember that the real estate consultant will be by your side to help clarify all the necessary points for a secure purchase.

Real estate agencies have portfolios with various properties available for purchase. At Casas do Barlavento, we ensure frequent listings of apartments, villas, plots, and even stores in the Western Algarve. Check out our portfolio and have a chat with us.

When you find your ideal home, it's time to sign the purchase and sale agreement to reserve the property by making a down payment. While both parties don't need to sign this contract at a notary, it's always recommended to do so.

The next step is to search for the best bank financing. For this, you can rely on a document containing all the information about the home loan. The European Standardised Information Sheet - ESIS (Ficha de Informação Normalizada Europeia- FINE) is provided at the beginning of the process to compare various bank proposals. It's advisable to visit multiple banks and see which one offers the best conditions for your situation.

In the ESIS, you'll understand all the costs associated with taking out a home loan. Additionally, if you choose a variable-rate mortgage, you'll find hypothetical data on a sharp increase in the APR (Annual Percentage Rate) to the highest Euribor value (indicating the highest amount to be paid in the worst-case scenario in Euribor's history). Consider whether you can handle the instalments even in the worst moments of the mortgage history.

Next comes the pre-approval from the bank for your mortgage. To achieve a positive outcome in this phase, it's crucial to align with some of the bank's requirements, such as your professional situation, income, and debt-to-income ratio.

If everything is in order, the next step will be the house evaluation you've chosen. In this step, the bank hires a specialised and independent company to assess the property and create a report. The appraiser will determine the property value based on various criteria, including location, size, and other relevant aspects. Explore these factors in more detail in this article.

Finally, the day of the house deed arrives, not without first making the payment for the IMT (Municipal Property Transfer Tax). On this day, all parties involved in the purchase and sale of the house will be present at the Land Registry Office or the Notary's Office. The final step is to issue the public deed, where all the mortgage conditions are formalised.

The process can become long and confusing if you decide to go through it alone. It's always preferable to have a professional from the real estate field by your side to assist with the necessary documents and, most importantly, in choosing the ideal home for you.

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What is the trend of Euribor for 2024?

In 2023, Euribor rates reached their peak, although significantly below the rates observed in 2008. Now, throughout 2024, it is expected that these rates will begin to decrease, easing the budgets of those who pay instalments for a variable-rate mortgage. Everything indicates a potential improvement in the situation; however, changes in the trajectory of inflation or economic indicators may lead the ECB to adopt new monetary strategies.

The buying process of a house using a mortgage can be complex, involving several stages that require some knowledge. Don't feel isolated in one of the most important steps of your life; contact Casas do Barlavento. We'll be happy to guide you from start to finish!