What is the Euribor interest rate? The Euribor (acronym for European Interbank Offered Rate) is the interest rate at which credit institutions in the euro zone buy and sell money to each other.

That is, it is the average interest at which most European banks grant short-term loans to, in turn, make that money reach both companies and individuals.

It began to be used in 1999 and is the index to which most of the mortgages in Spain are referenced, in addition to one of the most important types today.

The calculation of the Euribor is carried out by the Reuters agency, based on the loan offer prices of the main European banks.

Reuters publishes it every working day from 11:00, for each of its defined validity periods: one week, one month, 3 months, 6 months and one year.

Precisely, this twelve-month Euribor is the official reference rate most used for mortgage loans in Spain since January 2000.

Euribor interest rate

To determine this, Reuters removes the highest 15% and the lowest 15% of the interest rates provided by banks and, based on the remaining data, calculates the Euribor as the daily average of a panel of the most active entities.

As a result, a number is obtained that is rounded to three decimal places. In Spain, the Bank of Spain, and the Official State Gazette (BOE) are responsible for disseminating the different values of the Euribor.

There are several factors that directly influence the evolution of the Euribor, among which the general situation of the European economy and the decisions taken by the European Central Bank (ECB) stand out.

Both elements affect the value of money of financial institutions, on which the index successively depends.

Other aspects such as the amount of money in circulation in the market also influence its value.

Euribor interest rate reference

The Euribor is considered the basic reference rate for the mortgage market and for other derivative products such as futures or swaps.

While the Euribor does not affect the instalments in fixed-rate mortgages and only has a transitory influence on mixed-rate mortgages, it does condition the interest to be returned to the bank in the case of variable mortgages.

In this type of mortgage loan, the instalments that you will have to pay during the established repayment period will not always be the same but will be linked to the behaviour of the Euribor.

This is because the monthly payment in a variable rate mortgage is made up of the sum of two parts:

-The benchmark index: as mentioned, the Euribor is the most used index for mortgages in Spain.
-Differential: it is a fixed percentage that is added to the previous one. The spread on a mortgage is negotiated with the bank and represents the part of the interest that you get as remuneration when you lend money for the purchase of housing.

Euribor interest rate recalculation?

On the other hand, the Euribor is also considered when reviewing the instalment of your mortgage. Depending on whether your review is annual or semi-annual, once, or twice a year the fee will be recalculated based on the average of the Euribor close the previous month.

The impact of the Euribor on variable rate loans is clear. Following the calculation indicated above for the monthly instalment, if the Euribor is at 3% at the time of signing the mortgage and the differential is 1%, the interest that will be applied to the loan is 4%. Over time, in successive annual or semi-annual reviews, if the Euribor drops to 2% and if the spread remains at 1%, an interest of 3% will be applied to the loan.

Let us give a more concrete example. Imagine that you have a mortgage of 150,000 euros with an interest of 1% plus Euribor (which at the time of hiring was 0%) and a repayment term of 25 years. In this case, the fee you would pay is 565.31 euros per month. If after one year, the Euribor has risen to 0.5%, the fee will be reviewed and the payment you will have to make will rise to 598.56 euros per month.

At the time of taking out a mortgage and opting for one or another type of interest, you should consider the hypothetical scenarios that can be triggered and affect your financial health. If you opt for a variable interest rate based on a benchmark index such as the Euribor, you should assume that you will strongly feel the difficulties of the index.

This option offers both advantages and disadvantages. In an economic context of low interest rates, the monthly payment for the mortgage will also tend to decrease and will have an impact on a lower monthly fee. Likewise, the variable alternative offers greater flexibility in the terms to repay the loan.

Although both traits seem beneficial, there is a risk that they will turn against each other. If interest rates tend to rise, the value of instalments could rise and become a disadvantage. This scenario gives rise to a high uncertainty, the result of the difficulties in calculating how much you will pay at the end of the mortgage, and it is impossible to anticipate the behaviour of the Euribor from here to a term of 10 years.

Share this Euribor interest rate article!