Interest rate reduction will come to a halt again, but installments payable to the bank will decrease

After the Euribor rates fell in January for 3, 6 and 12 months, in February and March the behavior changed. In March, the three-month average monthly rate remained unchanged compared to February, in the six-month period there was a reduction and in the 12-month period there was even an increase. Even so, anyone who has a mortgage loan to be reviewed in April should see a slight decrease in the installment payable to the bank. Check your case

The uncertainty about when the European Central Bank (ECB) will start lowering its key rates is leading to Euribor rates having interrupted the downward movement that began at the beginning of the year. In March, the behavior of these rates was even different for each of the main maturities, with the three-month rate remaining unchanged in relation to February, the six-month rate decreasing and the 12-month rate registering a slight increase.

Despite this Euribor behavior, holders of home loan contracts whose contract is reviewed in April should register a slight decrease in the installment payable to the bank. A decline that occurs because, on the one hand, the monthly Euribor average for March that serves as the basis for the April review will be compared with the rate in force since the last review, that is, the average for December 2023 in indexed contracts 3-month Euribor, the average of September 2023 in contracts indexed to 6-month Euribor and the average of March 2023 in contracts indexed to 12-month Euribor. And on the other hand, because in addition to comparing interest rates, it is also important to consider that the amount owed also decreases over the period considered.

The simulations carried out by CNN Portugal based on the Banco de Portugal simulator allow us to verify that in all deadlines there is a reduction in the installment payable to the bank. In the case of contracts indexed to Euribor 3 and 6 months, in addition to the reduction in the amount owed, there is also a reduction in the interest rate resulting in a reduction in the installment. And in contracts indexed to the 12-month Euribor, despite there being a slight increase in the interest rate between March of last year and March of this year, the decrease in the capital outstanding is enough for there to be a reduction in the installment.

Thus, in a contract worth 150 thousand euros, 30 years, indexed to Euribor 12 months and with a spread (bank margin) of 1%, the installment in the last 12 months was 773 euros. In April, you will pay 763 euros, a drop of 10 euros that is fully justified by the fact that the outstanding capital is, after a year, just over 147,600 euros. If the comparison is made without reducing the capital outstanding, the installment increases as a result of the increase in the interest rate.

See your case:

How much has already increased and how the house payment will evolve in April

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NOTE 1 | What are Euribor rates

Euribor is the abbreviation for Euro Interbank Offered Rate. Euribor rates are based on the interest rates that a set of European banks are willing to pay to lend money to each other. In the calculation, the highest and lowest 15% of all collected quotes are eliminated. The remaining rates are calculated as an average and rounded to three decimal places. The value of Euribor rates is determined and published daily. There are five different Euribor rates, all with different maturities (one week, one month, three months, six months and 12 months).

NOTE 2 | The ECB has three reference interest rates:

– The rate for main refinancing operations, under which banks can borrow from the ECB for a period of one week: is 4.50%, but was set at zero between March 2016 and July last year;

– The deposit rate, which determines the interest that banks receive on deposits made with the ECB: is 4%. But between July 2012 and June 2013 it was zero. And between June 2013 and July last year it was negative, forcing banks to pay for the deposits they made with the ECB;

– And the liquidity provision rate, which determines the interest that banks pay when they take out loans from the ECB for a period of one day (overnight). It is currently at 4.75%.