By Andrea Hargraves 
A potential rise in Euribor could exacerbate mortgage lending, as families still recover from the crisis and face higher prices, with an increase of up to 1%, which means another €61 million monthly payment to banks.
Deco/Dinheiro & Direitos calculated if Euribor changes their current values, from about -0.5% to 1% – taking into account the number of active contracts, the average outstanding mortgage loan balance and the average term – and estimated that, in this case Every month, families in Portugal pay another 61 million euros in mortgage loan installments.
Looking at the simulation of a particular loan, a client who has a mortgage of 150 thousand euros for 30 years, indexed to Euribor for six months and at 1%, pays this month in installments 445, 83 euros (taking into account the current price of Euribor, in negative territory) . If Euribor’s share rises by one percentage point, it will pay €514.45, and if the rise is two percentage points, the premium will rise to €589.18. Last November, according to the latest data from the Bank of Portugal, there were 2.09 million mortgage debtors.
In Portugal, most mortgages are indexed at Euribor interest rates, so whether they go up or down has a significant impact on how much customers pay per month.
Since 2015, Euribor prices have been in negative territory, which has led to a significant decrease in the premiums paid to the bank.
In 2018, Parliament created a law requiring banks to compensate customers with home purchase loans whenever negative interest rates eliminate the “spread” (the bank’s profit margin).
Until then, when adding Euribor to the “spread” resulted in a negative rate, the banks applied the 0% rate, such that the legislation forced the banks to use the calculated negative value, to be able to reduce the specified amount in favor of the customer to the principal outstanding or create an interest credit in favor of the customers .
Lusa’s major banks have questioned how much they’ve returned to customers since then, but most don’t mention refunds due to negative rates. The Bank of Portugal also says it does not provide this data.
While there is talk of a possible change in monetary policy for the European Central Bank (ECB), with interest rates being raised to avoid further inflation, although the Frankfurt-based institution has ruled out this scenario for the time being, there are Fears that in the coming months, Euribor begins to rise, worsening credit (from companies and families).
If it does, the rally should be gradual and the Euribor scenarios reaching the 5% levels they were in 2008, when central bank policy moved them to those levels, is out of the question, but a rise of one or two percentage points may be out of the question. It is already difficult to manage in the budget of many families.
“Portuguese consumers and those who seek credit are not yet assimilated [este risco] This leads us to some concern. Nowadays, even because of banks’ incentives for credit, demand is adding to the higher real estate prices,” so higher Euribor prices could have a “significant impact on the future,” said economist Nono Rico Lusa.
Currently, he said, although families are contracting new loans at low interest rates, the loan amounts are high, amounting to nearly €120,000 on average new contracts in 2020 (the average balance outstanding in The year 2020 is about 62 thousand euros) and also with a higher average contract duration, which is 33 years in 2020 (the average in the contracts in force was 21 years).
This poses problems, because in addition to the financing being higher, the more expensive premiums (up to the maximum rate of effort for many families) do not prevent higher interest rates. In addition, the term of the amount is so long that it makes it more difficult or even prevents the restructuring of credit by increasing the term of credit, if it is necessary for families in difficulty.
Therefore, he fears that even in the scenario of a slight rise in interest rates, this will present difficulties for many families.
“Families should be careful, because low and negative interest rates are normal for them not to be maintained, at least for the entire term of the loan,” Nono Rico said.
For João Duque, a professor of management and finance at ISEG, if banks comply with the authorities’ instructions on adequate effort rates and conservative loans, there should be no problem of generalized default.
However, “if families immediately start taking on debts with the rope around their necks, any rise in the water will suffocate,” he said.
Joao Duque says the pressure on clients “will also depend on how quickly interest rates go up,” although he acknowledges that the rise is gradual.
According to the chief economist at Montepio, Rui Serra, only from 2023 onwards, the rise in the ECB and Euribor reference rates will have more relevant effects, above all “if the magnitude of this increase is greater than the values currently implied in the futures quotations”.
However, although there is still time, families will see their debt costs increase, and this is when – as he recalls – Portugal is “the OECD country with the highest levels of household indebtedness in relation to their respective incomes”.
Currently, in housing credit contracts, banks must inform customers in documentation about the credit that will be extended if interest rates reach the maximum value of the last twenty years.
In addition to looking at this data, economist Nono Riko advises clients to perform a simple math: “If my credit increases by 50%, will I be able to easily continue to comply?”.
For example, a loan with an installment of 300 euros per month will become 450 euros or an installment of 500 euros will become 750 euros.
Nuno Rico and Joao Duque say the problem isn’t just interest rates, but many factors that together put a heavy burden on family budgets. The increase in interest rates is exacerbated by an increase in the cost of living (energy, food, transportation), an economy that remains uncertain and low wages.
Last year most credit contracts were in deferral (suspension of interest and/or principal that lasted until September/December) and so far banks say there are defaults, but it is not generalized.
However, the first months of this year will understand the ability of families to carry this burden effectively, as there are still many who have not fully recovered their income and there will still be businesses who resent the crisis.
According to Deco, at the moment, in cases of difficulty, what the banks suggest to families is to create grace periods, extend the term of loans in contracts where this is possible or even suggest selling the property to pay off debts.