Have you heard of Euribor? If you are preparing to take out a mortgage loan, then you probably have. The Euribor is the European banking index that is used as a reference to fix the interest rate that will be applied to the mortgage loan.
What is it?
It is the interest rate paid between European banks for money lent between themselves. The interest is calculated by taking the average of the rates of the largest banks in the Eurozone as a reference.
Influences of the Euribor
The Euribor is influenced by a number of factors:
Credit supply and demand
Level of confidence towards the Eurozone economy.
When the Euribor rises, it means that banks are demanding higher interest rates from each other. This is due to uncertainty in the financial market. As a consequence, mortgage loans linked to the Euribor will increase. In the same way, when the Euribor falls, mortgage loans will also fall.
HOW THE EURIBOR AFFECTS A MORTGAGE LOAN
It is important to consider the Euribor before applying for a mortgage loan to make sure you are getting the best deal possible. If the Euribor is high, banks are likely to have a lower negotiating margin, which means you will get a higher interest rate. Conversely, when the Euribor is low, you are more likely to get a lower interest rate.
However, the Euribor only gives an indication and is not the only factor that determines the price of a mortgage loan. Many other factors are at play:
Price of the property,
Borrower's credit profile,
Types of mortgage, etc.
It is essential to understand how the Euribor affects us before applying for a mortgage loan. That understanding will help us to be prepared to make an informed decision about our mortgage.
INTEREST RATE DIFFERENTIAL
To understand how the Euribor affects the price of a mortgage loan, it is necessary to understand the concept of interest differential. The interest differential is the difference between the interest rate charged to the borrower and the Euribor. For example, if the Euribor is -0.5% and the bank applies an interest differential of 1%, then the interest rate on the mortgage loan will be 0.5%. This means that when the Euribor rises, the price of the mortgage loan increases, and vice versa.
For example, if you are applying for a 15-year loan of 200,000 euros with a Euribor of -0.5% and an interest differential of 1%, then the total interest to be paid would be 9,000 euros. Let's assume that the Euribor increases to 0.5%, while the interest differential remains at 1%. Then the total interest you will have to pay will be 10,000 euros - a significant increase of 1,000 euros.
As you can see, the Euribor is not only an important factor in understanding the price of a mortgage loan, but also to follow it in order to keep up to date with the movement of interest rates. We hope this explanation has helped you to better understand the Euribor and how it affects the price of a mortgage loan.