Euribor: Pros and cons of different timeframes

If you have a home loan, or are thinking about taking it out, you have certainly already wondered about what is the best rate for your case🇧🇷 Fixed, mixed or variable rate? Opting for the variable rate, there is another question that arises: Which Euribor is best for me? Should I choose 3, 6 or 12 months?In fact, the choice of Euribor term is crucial not only to define how much you will paymonthly for the installment of the house, but also the rate at which the installment amount will be updated throughout the contract. In a scenario of rising interest rates, such as the one we are currently witnessing, this is a growing concern for Portuguese families, whose home loan accounts for one of the largest shares of their monthly budget. differences between the various Euribor maturities and its impact on the monthly installment to be paid to the bank, so that you can choose the most advantageous for you.

What is Euribor?

Euribor is short for the European Interbank Offered Rate, a reference rate based on the average interest charged by a group of 52 banks in the Euro Zone (including, in Portugal, Caixa Geral de Depósitos) in the loans they make to each other, within a certain period. This is because financial institutions, such as families and companies, also have to finance themselves, using a reference interest rate for these loans. However, there is not only one Euribor, applicable to all loans, regardless of its duration. There are, in fact, Euribor rates for five maturities – one week, one month, three months, six months and 12 months – which are calculated based on the average of interbank loans with the same terms. European Federation of Banks, 15% of the highest rates and 15% of the lowest are excluded for the calculation. After all, the values ​​are published once a day, at 11 am (CET), 10 am in Lisbon. Euribor was created at the same time as the single European currency, on 1 January 1999, and has since been used as reference in various financial products such as bonds and derivatives, savings accounts and savings certificates and, of course, in mortgage loans.Also read: Rise of Euribor: is it the right time to amortize home loans?

The importance of Euribor in home loans

THE Euribor is one of the two elements that define the interest rate – more specifically the TAN (Nominal Annual Rate) – in a credit agreement with a variable rate, that is, the “price” applied to the home loan. The TAN results from the sum of the Euribor value with the spread (the second element), which is the margin charged by banks, and which varies depending on the customer’s profile, financing characteristics and loan guarantees. 1%, if the Euribor is at 2%, the TAN applied will be 2% + 1%, that is, 3%. Thus, the variation of Euribor is decisive, since it will directly influence the value of the installment payable to the bank.As we saw earlier, there are several Euribor with different maturities and values, and in mortgage loan contracts, the most common terms are 3, 6 and 12 months🇧🇷 The choice between them influences not only the value of the monthly installment (since the Euribor value is used in the TAN calculation) but also the rate at which the installment is updated. What does this mean in practice? It means that, if you have a home loan indexed to Euribor for 3 months, your bank can only review the interest rate value every 3 months🇧🇷 With the Euribor at 6 months, the review is semi-annual, and with Euribor at 12 months, the update will only happen once a year🇧🇷 In all cases, the Euribor value used for the installment that will be in force for the following 3, 6 or 12 months is calculated based on the simple arithmetic mean of the rates in force daily in the previous month. The value must be rounded to the nearest thousandth. For example, all contracts that start in November, or that have their regular review in November, use the average price of october quotes.Choosing the rate to be applied in the credit agreement – ​​Euribor 3, 6 or 12 months – it’s always yoursas well as the option for a variable, fixed or mixed rate. Also read: With the Euribor rising, should I opt for a mixed rate?

The different deadlines: pros and cons

Each of the Euribor deadlines has its advantages and disadvantagesso the choice between them should always depend on the borrower’s individual characteristicsalso taking into account the prospects for the evolution of interest rates.This is because the shorter terms of 3 and 6 months have lower valuesbut also imply a faster response to oscillations, as updates are more frequent (quarterly and semiannually, respectively). Thus, the monthly installment is lower, compared to what would result from the 12-month term, but the volatility is also greater. monthly fee should grow every 3 or 6 months, which may lead to greater instability in the management of the family budget. The 12-month Euribor ensures, on the contrary, greater cost stabilitywith the disadvantage of being higher🇧🇷 In this period, a kind of premium is paid for price stability. Let us consider a scenario in which a mortgage is taken out at a time when the Euribor is at its peak. If you opt for the 3-month term, you will benefit more quickly from the declinesWhile if you choose the period of 12 months, you will have to wait a year to feel the effect of the relief, paying more, every month, when you could be paying less. The same applies in the reverse scenario, in which you take out a loan at a time when Euribor rates are at their lowest. In a shorter term, you will feel the increases more quickly, but more progressively, while in a longer term, you will benefit for longer from low interest rates. However, when the time comes for the update, a year later, the increase will be much more expressive. Read also: Mortgage loans: Commission-free early repayment in 2023

Evolution of Euribor

After more than six years in negative territory, Euribor rates began to rise more significantly in the first quarter of this year, having surpassed the 0% threshold shortly afterwards. The reversal took place after the European Central Bank (ECB) admitted that it could raise interest rates, given the signs of rising inflation in the Eurozone. The Russian invasion of Ukraine in February further accelerated the trend, decisively sending interest rates on a worsening path. In July, the ECB ended up put an end to the era of cheap money, announcing the first rate hike in 11 years. It did so again two months later, in September, with the prospect of even more hikes at the next meetings. evolution tends to follow (and often anticipate) the movement of interest ratesso its trajectory is heavily influenced by the economic and monetary policies of the Eurozone central bank. Euribor at 3, 6 and 12 months are already in positive territory and the expectation is that continue to increase in the coming months, and over the next year🇧🇷 However, it is important to underline that the rise in interest rates by the ECB always happens gradually, and very sudden increases in key rates are not to be expected. Read also: Rise of Euribor: What is the impact and what to do?

Euribor impact on monthly installment

To understand the impact of different Euribor maturities on the value of the mortgage, nothing better than looking at a specific case, and at the evolution that took place over the last year. For this purpose, let us consider the example of a housing loan of 150 thousand euros, with a spread of 1% and a term of 20 years (240 installments). As we can see in the table below, with Euribor at three months, the monthly installment was 653.79 euros in October last year. It remained at that value for three months, and then dropped slightly to 652.58 euros in January this year. In April, the provision increased just over 2 euros to 654.79 euros and, three months later, in July, for the 663.94 euros🇧🇷 This month, the value was revised again, having risen by almost 50 euros to 713.58 euros.With the six-month Euribor, the installment was 655.15 euros in October last year (less than 2 euros higher than in the 3-month period), having remained at this level until April this year, when rose to 658.39 euros🇧🇷 This month saw a sharper increase, from 83.4 euros to 741.79 euros.Finally, with Euribor at 12 months, the installment, which was 657.03 euros in October last year, remained at that amount until October this year, when increased to 770.65 euros, an increase of 113.62 euros🇧🇷Housing loan of 150,000 euros, 20 years, with a spread of 1%Also read: Recent housing loan: Can I improve the conditions?

After all, which term should I choose?

As we said earlier, the rate choice Euribor is individual, taking into account what is most important to you: do you prefer to pay less and be subject to more fluctuations in the value of the monthly payment? Or do you give more importance to stability, even if you have to pay a little more for that? Likewise, it is essential to consider in your decision the prospects for interest rate developments. Currently, it is expected that the uphill cycle continue, at least until next year. So, it may be advantageous to opt for a longer term, guaranteeing that, for one year, your benefit will not be affected by the rise in rates. By choosing a shorter term, you will feel the increases more often, even if you pay a lower price.There is no “best” rate for all cases🇧🇷 Some people will see more benefit in having more stability, while others will favor the price factor more. Before going ahead with a mortgage loan, do the math, simulate your situation and take into account that the 3-month Euribor more often reflects the evolution of interest rates, while the 12-month Euribor implies a less frequent, but more pronounced, update. In order to evaluate your case, use the Euribor variation simulator in home loans, where you can test possible increases in Euribor and what impact they will have on your credit, in each of the periods. Doctor Finance. Step by Step, the doctors will help you make better financial decisions, making the whole process easier, free of charge. I want to know the best conditions for my case Read also: Housing credit: Families can have monthly “relief” from the IRS in 2023