Interest cut by the ECB reaches housing credit. Reduction in the installment payable to the bank in May should reach 30 euros

European Central Bank is expected to start cutting interest rates in June. Euribor rates fell again in April and anyone who has contracts to be reviewed in May will feel this effect. Check your case

Holders of home loan contracts that will be reviewed in May will experience a reduction in the installment payable to the bank which, in some cases, could even exceed 30 euros. A situation that arises from the fact that in April Euribor rates registered a decrease in all maturities compared to the average value in March, something that has not happened since the beginning of the year.

At the end of 2023, given the expectation of a decrease in interest rates by the European Central Bank (ECB), Euribor rates fell between November and December in all maturities, a movement that was repeated between January and December. At the time, the expectation was that the institution led by Christine Lagarde could cut key rates at the end of the first quarter, something that would not, however, happen, leaving doubts about when the decline in prices would begin. interest rates in the euro zone. The reflection of this uncertainty led to Euribor rates interrupting their downward movement, without, however, preventing the first signs of relief from being felt in the installments payable to the bank.

Now, with the expectation that the ECB will even start to lower interest rates in June, the various Euribor rates have fallen again.

In fact, since the euro zone monetary authority began the current cycle of raising interest rates, in mid-2022, placing them at their highest level ever, never before has there seemed so much certainty that the first cut will take place. at the next meeting, to be held on June 6 in Frankfurt, Germany.

In a survey carried out by Reuters, between April 15 and 22, of the 97 economists who participated, 91 stated that the ECB would reduce the deposit rate, currently at 4.00%, to 3.75% in June. “Only a major disappointment with wage data could derail a cut in June – which is very unlikely,” Rabobank economist Bas van Geffen told Reuters.

Lagarde has stated that the ECB’s decisions are always dependent on economic data, particularly those relating to inflation, economic growth and the evolution of wages due to the effect these may have on price growth. And by the June meeting, the ECB will have a lot of data to analyze. Today, Tuesday, the quick estimate for inflation in the euro zone for April will be released, as well as preliminary data on economic growth for the first quarter of the year. In May, data on wage growth in the euro zone for the first quarter of 2024 will be released and on the last day of next month, the inflation value for May will be released.

Holders of home loan contracts whose review takes place in May will not, however, have to wait for the ECB’s decision to begin to feel the effect of the likely interest rate cut.

According to simulations carried out by CNN Portugal based on the Banco de Portugal simulator, it is possible to verify that there will be a decrease in the installments payable to banks.

In a contract worth 150 thousand euros, 30 years, with a spread (bank margin) of 1%, indexed to Euribor 6 months, the reduction in the installment payable to the bank should even slightly exceed 30 euros. The April average rate of the 6-month Euribor, which will serve as the basis for this review, was set at 3.84%, a value that compares with the rate of 4.115% for October 2023, which served as the basis for the last review of contract in November. In addition to the drop in the interest rate that serves as an index, between one date and the next there was also a decrease in the value of the outstanding capital and it is these two combined effects that allow a reduction in the installment payable to the bank of 30.57 euros.

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

30-year loan with 1% spread || April Euribor only with values ​​until the 29th

EURIBOR 3 MONTHS

EURIBOR 6 MONTHS

EURIBOR 12 MONTHS

Despite the drop that will be seen in the installments payable to the bank in May, the charges to be borne with most home loan contracts are still higher than those seen a year ago. And if a comparison is made with the values ​​practiced two years ago, before the start of the cycle of interest rate increases by the ECB, the difference is even more significant.

Using the same example, of a loan of 150 thousand euros, for 30 years, with a spread of 1%, indexed to Euribor 6 months, the installment payable in May 2022 was only around 460 euros, a very below the almost 780 euros to be paid in 2024. A difference that results from the fact that in April 2023 the 6-month Euribor average registered a negative value of -0.311%.

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 of the main refinancing operationsunder which banks can take out loans from the ECB for a period of one week: it is at 4.50%, but was set at zero between March 2016 and July last year;

– The fee of deposit, which determines the interest that banks receive on deposits made with the ECB: it 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 rate of liquidity provision, which determines the interest that banks pay when they borrow from the ECB for a period of one day (overnight). It is currently at 4.75%.