What is Euribor and how does an increase in euro interest rates affect my Spanish Mortgage?

Euribor stands for Euro Interbank Offered Rate. As the name suggests, Euribor is the average interbank interest rate at which European banks are prepared to lend to one another. Why do banks lend to one another? Banks in the Eurozone do not always require all of their disposable liquidity and at the same time there are other banks which sometimes require extra liquidity and for this reason there is an interbank lending market (Euribor) where the banks can offer or acquire finance. This market is only accessible to the banks – neither individuals nor companies have access.

Euribor is published and varies on a daily basis. It is not one single rate indicator, but in fact it has eight different interest rate values according to the period of time that is applied. This ranges from one week through to twelve months. In the case of a Spanish mortgage the most commonly used rate indicator is 12 months Euribor.

Libor in UK works in a similar way for the pound sterling.

How does Euribor affect my mortgage payments?

A rise or fall in interest rates will affect your mortgage depending on the type of interest rate that you have agreed with your banks. Fixed rate mortgages in Spain are usually fixed for the entire term of the mortgage and do not change throughout the lifetime of the loan. These are less common than variable rate mortgages. On a variable rate mortgage, the repayments depend on two factors:-

The benchmark index – in most cases this is 12-month Euribor.

The margin – this is the percentage that is added onto the Euribor rate and which is agreed with the bank at the outset of the mortgage.

On a variable rate mortgage, the interest rate as described above is reviewed on an annual or semi-annual basis and is adjusted in line with Euribor. If the Euribor rate has decreased, then the mortgage rate will decrease and likewise if it rises, the interest rate on the mortgage will also rise.

How does an increase in European base rate affect Euribor?

Last month (July) we read about a Eurozone interest rate increase of 0.5%, thus putting an end to the long reign of negative interest rates which have been seen since 2016. This was announced by the European Central Bank (ECB), which is the institution in charge of monetary policy for the Eurozone. The main objective for this increase is to control spiralling inflation rates. The theory is that if you increase interest rates, then you are reducing spending and as a result inflation is reduced.

How does this rate increase affect Euribor?

The European Central Bank is the institution that the banks go to in order to obtain funding and to receive injections of liquidity and where the minimum official interest rate is dictated by the ECB. When the ECB increases the rate as we have recently seen, it becomes more expensive for the banks to obtain finance from the central bank then logically this has a knock-on effect to the interbank lending rate – Euribor – and therefore to the price of mortgages for consumers. In fact, the effects of a potential rate increase from the European Central Bank have been affecting Euribor rates for the last few months. 12-month Euribor has gone from -0.5% at the end of 2021 to currently around 1%.

Euribor rates therefore depend directly on the current economic situation in Europe, where at the moment, inflation is the main factor. The decisions taken by the ECB to control inflation i.e. increase rates and therefore increase the price of money have a direct effect on borrowing costs for institutions and for the individual consumer. Please feel free to contact us for further information on your existing or future Spanish mortgage.

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