Steep Drop in Euribor Translates into Cheaper Mortgages

Raymundo LarraĆ­n Nesbitt, December, 31. 2008

The (12 month) Euribor fell today to 3.085%, and will set the average for December at 3.4%.

The Euribor (ER) is the rate of interest at which banks lend to each other. It is the reference which most Spanish Lenders take to set the mortgages’ rate of interest. This rate is reviewable by your bank, depending on your Mortgage Deed, every six months or once a year. The European Central Bank (ECB), which sets European Monetary Policy for all EU members with the exception of the UK, has no direct control over the ER.

Post credit-crunch fear, shortage of liquidity in the markets, widespread bankruptcies and plummeting stock prices unseen since 1929’s infamous Wall Street’s Stock Market Crash has gripped banks with fear in the last quarter of 2008. This fear to lend to each other due to the mutual mistrust on one another’s writedowns has fuelled the ER hiking it to levels which were unprecedented historically.

In line with the US, the European Central Bank has lowered consecutively the interest rate which indirectly affects the ER. The Euribor rate reached an all time high on October 2008 peaking at 5.393%. To this you must add the spread on paying a mortgage which typically for a non-resident will be 1% on top of the Euribor rate. This caused a surge of mortgage defaults in 2008.

The reason being is that the ECB is lagging behind the United States Monetary Policy which has now set its interest rate at almost zero (0.25% to be exact) to hopefully fuel the ailing American economy. So the ECB has quite some catching up to do next year as its interest rate is currently held at 2.50%. Currently the Euribor rate for 12 months is set at 3.085%

In any case the continued policy of the European Central Bank to lower the interest rates over the last months will help to drive down the Euribor rate which is always news most welcomed by everyone, specially borrowers. Spanish banks will revise and adjust the Euribor rate which in turn will lower your monthly mortgage repayments. This normally happens in July.

For example, a typical mortgage of €300,000 revisable next July 2009 could drop by as much as €550 a month if the Euribor rate continues its downward trend and hits the 2% forecasted by financial experts by mid 2009.

So for all those that are struggling to pay their mortgage loan and are considering defaulting you should be aware of this significant drop in 2009. We suggest you find out at your bank when the Euribor rate will be adjusted for your own particular case and how much money you stand to save.

Related articles

Bank Repossessions in Spain – 21st February 2014

Advice to Struggling Mortgage Borrowers – 8th March 2011

Bad Debtor’s List (‘Fichero de Morosos’) – 8th April 2014

Spanish Creditors Pursuing Debts Abroad – 8th May 2014


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