What is the Euro Interbank Offered Rate (EURIBOR)?

The Euro Interbank Offered Rate (EURIBOR) is the basic rate of interest used in lending between banks on the European Union interbank market, while it is also used as a reference for setting the interest rate on other loans. It is often referred to as the “Cost of Funds”. EURIBOR in fact refers to a set of rates that correspond to different maturities – one-month, three-month, six-month, and twelve-month – and are updated daily. The EURIBOR rates are based on the average interest rates of a large selection of European banks.

How is the interest rate on a mortgage calculated?

An interest rate comprises two basic elements: EURIBOR plus the Credit Spread.

Credit Spread, also termed the “Credit risk premium”, is the price a lender charges on a loan against the credit risk it takes. The higher the credit risk, the higher the spread; the lower the credit risk, the lower the spread. It should be noted that once the spread is finalized in a property finance loan it remains FIXED throughout the tenor of the loan. The spread depends upon numerous factors, including:

• Your credit history (e.g. the length of your credit history and your credit score): Generally, the higher your credit score, the lower the spread.

• Type, size, and stability of your income: For example, a government employee with a handsome salary in relation to the loan amount will result in a lower spread.

• Length and type of loan: The longer the tenor of the mortgage, the higher the spread.

• Type of collateral/security: The higher the liquidity of collateral, the lower the spread.

How does a change in EURIBOR impact mortgages?

If the EURIBOR increases, the installment on a property finance loan will also increase. Similarly, if the EURIBOR goes down then the installment/cost of the loan will also go down.

As an example: Mr. Property was approved for a property finance loan on 1st January 2022. The loan amount was €100,000 and the length of the loan was 10 years, with an interest rate of 7.25% (6-month EURIBOR at 0.25%, plus a Credit Spread of 7.00%). This resulted in monthly installments of €1,168.00, with a total loan payment value of €140,215. However, if the EURIBOR were to rise to 0.50% on 1st July 2022 (taking the revised total variable rate to 7.50%) then the monthly installments would rise to €1,181.00, with a total repayment value of €141,725.00.

It is important to note that, although interest rates on a mortgage are tied to the EURIBOR rate, they are only revised after the defined period of time stipulated in the loan agreement (i.e. interest rates can be fixed for a defined period of time). Let’s elaborate on this by returning to the example of Mr. Property. His loan started on 1st January 2022 with a 6-month EURIBOR of 0.25%. So, if the EURIBOR rate rose to 0.50% after two months (on 1st March 2022), the monthly repayment amount would stay at €1,168.00. Similarly, if after two months, the 6-month EURIBOR rate decreased to 0.15% then Mr. Property would not get the benefit from the reduced rate.

Moreover, the EURIBOR rate increases with the time of maturity, meaning the 6-month EURIBOR rate would be greater than the 3-month EURIBOR rate. This up-surging trend is due to the increase in liquidity risk of the bank.

Another fact to be noted is that if EURIBOR is trading negatively, as illustrated in the below table, then the lender will floor the rate at 0%. To illustrate this, we will take the above example of Mr Property. If the 6-month EURIBOR rate is -0.362%, the total markup rate would be 7.00% – i.e. only the Credit Spread of the bank.

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