The Euribor is an index, a numerical value that indicates the average reference interest rate at which financial entities lend money on the European market. Every time a bank asks for money from another, they establish an interest rate, using the Euribor as a benchmark. In this way, all the banks can calculate the ‘price’ of their loans in a simpler manner, more in keeping with the current market.
Mortgages and the Euribor
People who have a variable mortgage linked to the Euribor need to take into account rises and falls in this index, as their mortgage will vary depending on its value. If the Euribor rises, the mortgage payments will as well. If on the contrary, the value of the Euribor falls, the mortgage payments will drop. For example, if you were granted a mortgage at Euribor + 1% and at the time of calculating the interest the value of the Euribor is at 2%, the total interest will be 3%. If the Euribor rises to 4%, then you will have to pay an interest rate of 5%.
These upward or downward changes can be positive or negative for people with mortgages. To avoid this uncertainty, there are fixed rate mortgages, which will not vary in accordance with the Euribor, as the interest rate paid each month is always the same. This is a good option for people who prefer something more stable, but is not necessarily more economical.
The value of the Euribor is dependent on numerous factors, such as country debt levels, economic growth, inflation, solvency of the banks and even consumer confidence. To establish the value, the rates offered by twenty-four of the main European banks for their transactions are taken as benchmarks and averaged out.
There are eight different Euribor interest rates, such as weekly, monthly or annual. The latter is especially important because it is used to calculate the rate on variable mortgage loans based on this index.