By now we all have an idea of what inflation is. We have read and heard that the inflation is too high. And we all already feel it in our wallet, whether in the monthly bills, or in a simple trip to the supermarket. One of the “weapons” to control inflation is precisely to raise interest rates. And this is one of the roles of the European Central Bank (ECB), which in recent months has carried out a series of hikes in benchmark interest rates for the Euro Zone. However, these measures have as their main objective to respond to the high inflation that is felt, caused, in the first place, by the post-pandemic economic recovery and for all the demand accumulated in those two years, and, secondly, for the war in Ukraine, which created an energy crisis in Europe, with the consequent sharp rise in gas and electricity prices, two goods with a major impact on the final cost of industrial production. When interest rates go up, what one wants, in practice, is restrict household consumption. If demand declines, or at least doesn’t grow, prices should decline, or stabilize. Thus, the rise in interest rates has a direct impact on households, who see their credit burdens increase. This is the period we are going through, and we must be aware that it will be the context in which we will continue to live in the coming times.
What can we expect for the near future?
If we take into account the ECB’s projections and the analysis of various socioeconomic indicators, there is a strong probability that the Euribor rates most used in mortgage loan contracts in Portugal (Euribor at 6 and 12 months) are above 3% in early 2023. If confirmed, this scenario represents a very significant increase in the cost of housing credit, especially to all those who have a loan whose review date is before August and whose associated index is the 12-month Euribor. As an example, a family with a mortgage loan of 250,000 euros, with a term of 35 years and a spread of 1.25%, and which had its deed in February 2021, currently has a monthly installment of 696 euros. . If the 12-month Euribor rises above 3%, this family will pay 1,145 euros, plus 449 euros per month. In practice, this family will experience a 64% increase in the monthly charge and, within a year, it will spend another 5,300 euros. This scenario, which complicates the family budget of those who already have a home loan, also complicates those who are looking to buy a house, as with the sharp rise in real estate prices in recent years, the rise in rates, and the need for the existence of equity, it is access to credit more difficult. For example, someone aged 35, and with a net monthly income of 1,500 euros, a year ago had an effort rate that allowed him to buy a property up to 220,000 euros. Today, he can only buy a property worth 162,500 euros, which implies a reduction in the level of properties he will have access to, or the need to make a larger amount of equity available.
What steps to take?
There are several possible paths. The most appropriate solution depends on several issues, namely the needs and situation of each one.
For those who already have credit
While all times are relevant when looking at our monthly charges, the current moment adds urgency to the importance. That is, it is imperative that let us look carefully at all those who are our financial burden, from the use of credit cards, to personal and car loans, home loans and insurance portfolios. These are the main financial costs of Portuguese families, and they are often ignored or neglected, needlessly aggravating the impact on the family budget. Basically, if we must always be attentive to our expenses and their optimization, in a period like the one we are currently experiencing, it is essential to review all expenses, in order to reduce charges. Therefore, we must periodically analyze what the marketchange at every moment, and see if it makes sense to negotiate with the institutions with whom we have these financial costs, or even to change the institution and/or product through a transfer or settlement and new contracting. This simple measure can save thousands of euros, and Doctor Finance can help improve your financial well-being. Another measure that may be relevant is the possible repayment of credits, or changing deadlines. In case we shorten the term, we reduce the total interest paid, and in case we increase the term, we reduce the monthly charge. We advise that you should maintain a family reserve fund whenever possible, at least equal to 10% of annual income. This means that you must not jeopardize your emergency fund
For those looking for credit
We must also be diligent in search for the best conditions and the lowest costs associated with credit. We have to invest time in identifying the institution that best meets our needs, as this can represent a substantial reduction in the final cost of our credit. The legal need to use equity for the purchase of a house also implies we create savings habits. We know today that we need, at least, 10% of the value of the property plus costs and taxes to face a future purchase, so we have to look at our income and understand the maximum amount we can save, without jeopardizing our comfort. In short, although we are in a difficult economic context, it is very different from the financial crisis that hit the country between 2009 and 2014. National banks are doing well in terms of liquidity and solvency ratios, the employment rate remains stable, and there is a willingness on the part of economic agents to solve, with specific measures, any problems that may arise in families. It is our conviction that the first half of 2023 will be marked by a worsening of the main economic indicators, and it is recommended that we do something to protect us from this context. On the other hand, we believe that the second half may already show some recovery in purchasing power, and even some relief from benchmark interest rates. Therefore, we argue that the real estate market, although demand may slow down, will maintain a dynamic very close to that of recent years, and consequently, mortgage loans will continue to be a priority for national banking. In the remaining credit products, the positive momentum that has been observed in 2022 is expected to continue in 2023, with emphasis on car credit, which is expected to grow with the increase in the number of new car units available. in the market.
Prepare for higher interest rates, with peace of mind
The clues are released. Interest rates will continue to rise. Soon the cost of credits will continue to increase. The trick is to act. IT IS anticipate and prepare your wallet for the clash. Review charges, from the highest to the smallest; renegotiate the contracts for all the services you have hired. Cut out the superfluous and focus on the essentials. Don’t expect to feel without any scope to act. Look for specialists who facilitate this path. And, you know, count on Doctor Finance to help improve your financial well-being. 
Cláudio Santos began his career in the banking sector in 1992 at Loyds Bank, ending up in 2012 at Deutsche Bank after working at Banco Fomento Exterior and Banco BPI. After an international experience of 3 years as Commercial Director, he joined Doctor Finance in 2016. He is currently Partner, Board member and Chief Commercial Officer (CCO).