It was born on January 1, 1999, the same day that the European Union's single currency was introduced to the world. Although it is called the European Interbank Offered Rate, it is better known as the “Euribor” in short. The aim of this plan was to harmonize interbank interest rates in the eurozone, from the moment the single currency – the euro – began to circulate among the countries that adopted it.
For some time, while the escudo was still around, it coexisted with the lesbor, as an index used for housing loans. But with the funeral of the Portuguese currency, it has become a reference, queen and mistress, for almost all banking financing in Portugal. That is why it is so present in our lives. For those who buy a house on credit, it is truly a kind of eternal companion.
1. What is Euribor?
It reflects the price at which banks “sell” money in the interbank market. Euribor is an index that reflects the interest rate on loans that commercial banks make to each other in the euro area. Yes, banks also lend money to each other, and the reason is the easiest to understand: because they need it.
The index is defined daily by the European Banking Association and is obtained by averaging the interest rates announced by 52 major European institutions. Caixa Geral de Depósitos is the only Portuguese bank to join this group of privileged banks.
When calculating the average, 15% of the highest rates and 15% of the lowest rates are excluded, to arrive at the most accurate value possible. The announcement is issued religiously every business day at 10 am.
2. Doesn't the European Central Bank set the value of Euribor?
No. What happens is that the ECB has a significant influence on the behavior of commercial banks in the dynamics of interbank credit. In other words, if the policy set by the ECB is to boost the economy (expansionary), interest rates tend to fall, and thus money becomes cheaper and more accessible.
On the other hand, if it is necessary to adopt more restrictive measures, to remove liquidity from the economy and thus control, for example, inflation (high prices), rates will tend to rise. And since banks are also financed by the ECB, they tend to replicate these trends.
3. If it is determined by banks, why was Euribor negative?
Because the financial crisis broke out in the world in 2008, causing turmoil in all latitudes, and the monetary policy adopted by the European Central Bank since 2015 has been expansionary. To give a boost to the economy, the institution led by Mario Draghi and the commercial banks themselves began setting negative interest rates. And Euribor, which reflects these rates, as explained above, followed suit and entered the negative territory.
However, after seven years below zero, Euribor reached positive rates on April 12, 2022, and in less than half a year, it crossed the 2.5% mark, at maturity in 12 months, after having exceeded the value of 4.2% in September 2023.
4. Okay, but what should I do with Euribor?
A lot, for sure. Do you own your own home? And did you buy it with a variable rate mortgage? If the answer to both questions is “yes”, you are part of the vast majority. In Portugal, around 70% of mortgages have variable rates.
The interest rate is determined by two components added together: Euribor (in its various maturities, mainly 3, 6 and 12 months) and a fixed spread (bank profit margin). Euribor is produced from the monthly average of the index in the month preceding the credit contract.
In scenarios of rising interest rates, mortgage payments may rise significantly. Simulate this value based on Euribor increases.
5. “Euribor at 3, 6 and 12 months”. Please explain.
During the term of the housing loan contract, the index value is reviewed every 3, 6 or 12 months, depending on the maturity (i.e. duration) of the chosen Euribor. The calculated values vary for the different deadlines. In Portugal, most loans to buy a house are indexed to the 6-month Euribor, although in new contracts, the 12-month Euribor already prevails. The value of the installment due to the bank may therefore vary through the periodic review of Euribor.
6. Is Euribor very volatile?
It is not a fixed amount, so there are always ups and downs, which necessarily affect the monthly installment due to the bank. Do not forget that Euribor is the variable component of the interest rate applied to the credit contract. If the average rises, the rate (and therefore the installment) also rises and vice versa.
The variability of the index depends largely on economic shocks. In October 2008, a year of bad memory, the 6-month Euribor averaged the previous month was 5.219 percent. In December 2021, the index value reached -0.545 percent. Less than two years ago, in October 2023, the 6-month Euribor rate reached 4.115 percent, its highest value in recent times.
7. When and how was negative interest rate applied to mortgages?
Inspired by a proposal from DECO PROteste, legislation was approved in May 2018 requiring banks to fully reflect negative Euribor averages. By the beginning of 2022, consumers are expected to receive approximately €12 million in negative interest, averaging €326 per contract.
For cases where the average index exceeds the spread value, a credit is created to deduct future interest, although most banks deduct this amount from the existing capital.
8. While the Euribor result is negative, and since the adopted legislation is not retroactive, how much have you lost?
The answer comes through an example. If, in 2016, you had a mortgage of 150,000 euros, with a profit margin of 0.25%, plus EURIBOR for 3 months (negative, in May 2018), you would stop receiving approximately 190 euros until the law comes into force.
9. What is the expected development of Euribor?
Being a variable index, fluctuations naturally occur, and this idea should always be in the mind of anyone taking out a variable rate mortgage. For the simple reason that a contract like this lasts for 30 years on average. It is not at all reasonable, and history does not prove it, that Euribor did not have many lives during that period. Therefore, after a period of negative interest rates, since the beginning of 2022, a strong upward movement began, which was reversed at the end of 2023, to start a period of slow decline that is expected to continue in the coming months.
10. Esther, who are you?
It stands for Euro Short Term Rate and could replace Euribor. There has been talk for a long time about finding another indexer, for transparency reasons.
EURIBOR is vulnerable to manipulation, as it does not reflect real market conditions, and is generated from values announced by banks (in a kind of “price intention”) and not from actual transactions being executed.
However, in 2021, Ester replaced Eonia (“Euro Overnight Index Average”). This was created to reflect the amount that a bank has to pay when requesting funds in one day. In practice, it has no impact on consumers, as banks must continue to use Euribor as an indicator of credits. This should undergo gradual changes in its calculation methodology, so that it also starts to be calculated based on real transactions and is not subject to the aforementioned manipulation.
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