In recent months, we have heard about Euribor daily. You only need to turn on the television or go online to find out about this interest rate. Do you know what Euribor is? If you have bought a property with a mortgage, you know that this interest rate affects your monthly repayments, but do you know why? If you don't understand what Euribor is, its history, why it exists and what influence it will have on our lives in the future, you can clarify all your doubts about this indexation factor here.

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When was Euribor created?

Euribor entered our lives on the same day the European Union's single currency was established, January 1, 1999. The most common name is Euribor, but it is made up of the words European Interbank Offered Rate to make the name shorter. Because Europe was now using the same currency, this rate was created to standardize interbank interest rates in the Eurozone. Before the implementation of this new interest rate, Portugal used the Lisbor, which coexisted with Euribor until we made the euro the only currency in circulation in the country.

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What is the Euribor?

To understand this interest rate, it is necessary to first understand that banks lend money to one another and charge a fee for the money "sold." Euribor is nothing more than a measure of the interest rate on Eurozone interbank loans. This index is set by the European Banking Federation and is the average of the interest rates of the 52 largest banks in the Eurozone.

To obtain a more accurate result, the 52 most important banks in the Eurozone share their data, with 15% of the lowest and 15% of the highest interest rates excluded. The announcement of this interest rate is made daily at 10.00 am. The only Portuguese bank in the group of the most important European institutions is Caixa Geral de Depósitos.

When does the European Central Bank come into play? The European Central Bank (ECB) has the most sway over interbank lending. It is the one who makes the plans for the Eurozone banks and implements measures that the other banks usually follow. When the ECB takes the path of economic fluidity and dynamism, interest rates fall, as we have seen in recent years. The expansionary tactics ECB developed to boost the economy after the 2008 crisis led to interest rates falling into negative territory in 2015.

If, perhaps, we are in a period of inflation, that is, of rising prices, this tends to reduce liquidity, which causes interest rates to increase. This is our current reality, and anyone who has a variable-rate mortgage will see their rate rise sooner or later. In April 2022, after seven years of negative interest rates, the 12-month Euribor reached positive levels, reaching 0.005%, having risen in recent months. Several factors contributed to inflation, but we can mention the pandemic and the invasion of Ukraine as the most important ones.

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Does Euribor have 3, 6 and 12-month terms?

Yes, which means, the Euribor is checked, taking into account different maturities. A loan's term is thus nothing more than the time it takes to calculate the instalment amount. The monthly instalment can increase or decrease within 3, 6 or 12 months (these mortgage interest rates are the most commonly used). In Portugal, most loans are linked to the 6-month Euribor.

Long before deciding on a loan term, you must decide whether you want a variable-rate loan linked to Euribor (with terms of 3, 6, or 12 months) or a fixed-rate loan. In the latter case, the monthly instalment always remains the same, regardless of whether the ECB decides to raise interest rates to curb inflation. The fixed interest rate means a certain degree of security, as you always know how much you will have to pay each month. However, in recent years, choosing this interest rate has meant higher payments when compared to the variable rate.

It is critical for those who have a variable-rate mortgage to be informed. This website keeps track of Euribor on a daily basis.

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Are there other indices besides Euribor?

Reference interest rates play a fundamental role in the various financial markets of the world. As previously stated, Euribor has been in use in the Eurozone since 1999. In 2019, there was talk of a new interest rate to replace Euribor in order to be more transparent than the previous one. Ester, an acronym for "Euro Short-Term Rate", should reduce the possibility of manipulation and better reflect real market conditions. This is because Euribor is based on assumptions about values banks quote and believe they will be charged when they borrow money from other banks.

The Ester is the new reference rate, replacing the EONIA on 3 January 2022. It has more realistic calculations and avoids manipulation scandals like those that occurred during the 2008 crisis. It is a short-term interest rate based on confidential statistical information on individual transactions in the European money market for deposits of 50 institutions (not only banks) reported to the ECB. These changes will have no impact, at least for the time being, on the financial solutions and products offered by banks, so we will continue to use Euribor as a reference rate in Portugal.

Do you want to buy a house with a mortgage?

This is a significant moment in everyone's life, a goal many people strive for. If you must use a mortgage to purchase a home, you should do so with caution and knowledge.

When selecting a home, do not dismiss the advice of a real estate consultant. Ask several questions, and if the house you choose is second-hand, inquire about the owners' intentions to sell. Remember that the real estate consultant is at your side to help you find out all the necessary points for a safe purchase.

Real estate agencies have portfolios of properties for sale. At Casas do Barlavento, we guarantee a frequent search for apartments, villas, building plots or even commercial properties in the Western Algarve. Visit our portfolio and talk to us.

Once you have found your ideal home, it is time to sign the promissory contract to reserve the property by paying a deposit. This contract does not have to be signed by both parties in a notary office, but we recommended it.

The next step will be the search for the best bank financing. For this, you can count on a document containing all the information about the housing credit. The European Standardized Information Sheet (ESIS) is provided at the beginning of the process so that you can compare the different offers from the banks. It is advisable to visit several banks and check which offers the best conditions.

ESIS allows you to keep track of all the costs associated with obtaining a mortgage. Even if you take out a variable-rate mortgage, you will find hypothetical data there on an abrupt increase in the Nominal Tax for the highest Euribor (the highest amount you will have to pay in the worst case). Consider if you will be able to pay off your instalments even in the worst case of your mortgage.

The next step is the pre-approval of your mortgage by the bank. To receive a positive response at this stage, you must meet some of the bank's requirements, such as your professional situation, income, and effort rate.

If everything is in order, the next step is the valuation of the house you have chosen. In this step, the bank hires a specialized and independent company to value the property and prepare a report. The appraiser determines the property value depending on the location, the size and many other aspects of the property. You can find out what these are in this article.

Finally, the day of the deed of the house arrives, not before the IMT (Municipal Tax on Onerous Transmissions of Real Estate) has been paid. On this day, all the intermediate parts of the house purchase and sale are handled at the Land Registry or the Notary's Office. The final step is the issuance of the approval letter confirming all the terms of the mortgage.

The process can be lengthy and confusing if you decide to go it alone. Always prefer to have a real estate professional by your side to help you with the necessary documents and, above all, to help you choose the ideal house.

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The process of buying a home with a mortgage can be complicated, as several steps require some knowledge. Do not feel alone in one of the most important steps in your life, and contact Casas do Barlavento. We will be happy to help you from start to finish!