Record-low Euribor will cut mortgage payments by up to 20%

Euribor rate is good news for borrowers
Euribor rate is good news for borrowers

In times of recession, social and wage cuts and rising unemployment, good news is scarce. But those citizens whose mortgages are due for review will at least reap the benefits of the descent of the Euribor. Falling interest rates and, according to analysts, the prospect that the European Central Bank are to lower them again, have led to this European mortgage index dropping to its lowest level since it began trading in 1999.

This week, the daily Euribor rate stood below 1%. Using the available data, (in the absence of data for the last two sessions confirming the last thousandth), it is calculated that the monthly index will close July at 1.062%, which means that mortgages with the longest terms will benefit from a discount of up to 20.5%.

The Euribor, which is the rate at which banks lend to each other, has now registered nine consecutive months of declines. The biggest drop, however, has been in the last month, going from 1.219% to 1.062% after the ECB decided to lower interest rates from 1% to 0.75%. Any changes in this indicator impacts on citizens who pay a mortgage, especially those who bought before the start of the crisis, and now mortgage holders whose loans are due for review can breathe a sigh of relief.

The mortgage holders who will benefit most from the falling rate are those with longer-term loans. If the loan has a duration of 30 years, for an average loan the payments will fall by 13.9%, for 40 years they will fall by 17.4% and for those who signed loans of 50 years, by 20.5%.

There is particular benefit from the descent in the Euribor, for those who signed their loan before the real estate sector began to collapse, since mortgages contracted at that time were subject to lower spreads of between 0.40 and to 0.75 points.

This won’t be the case for those who have contracted their loans in recent years or are about to do it now, because analysts believe that the much higher differentials applied to these contracts, swallow up any drop in the Euribor.

Even so, Professor of Applied Economics at the University Pompeu Fabra, José García-Montalvo, stated that in the past two months “we are seeing a contention and even a decrease in the risk premium over the Euribor”. According to the National Statistics Institute, the average interest rate at which mortgages were granted in the month of May was 4.32%, which represented a decline from the previous month.

El Pais reported that whoever buys a house now will at least have the consolation that the prices of apartments are continuing to fall, at an even faster pace, and are now 23.6% cheaper than in 2008, and that if they buy before the end of the year they may still benefit from VAT of 4% and tax relief. Nor shall they have a ground clause included in their contract, which prevented the lowering of the Euribor from a specified level.

García-Montalvo believes that the monthly Euribor will fall below 1% and notes that this circumstance will increase the disposable income of families saddled with a mortgage. However, that gain may be diminished by rising unemployment.

Member of International Financial Analysts (IFA), David Cano, said that the decline is mainly due “to cuts in interest rates and the expectation that they will fall further”, to 0.5%. Cano predicted that the index will continue to relax in the “next six to nine months,” although, in his view, the minimum levels to which the interest rates are heading, also significantly depletes the fall of the Euribor.

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