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How Euribor influences your mortgage rate

22 JANV. 2019 | PROPOSED BY OUR PARTNER ING LUXEMBOURG

We discussedin a previous article the differences between the fixed interest rate and the variable interest rate in a mortgage. As a reminder, the variable rate (and therefore your monthly payments) increases or decreases according to the evolution of the rates at which banks are financed. The benchmark is usually the Euribor, or euro interbank rate. What is it about ?

Euribor is the abbreviation for the Euro Interbank Offered Rate (in French, Interbank Rate offered in Euro or TIBEUR). The Euribor rate is the interest rate with which European banks lend themselves to each other. Banks that borrow money from other banks can reuse this money to lend to others or their customers for a commercial margin. Euribor is, in a way, the purchase price paid by a European bank for short-term loans. Unlike the interbank interest rate on the London market, the London Interbank Offered Rate (LIBOR), which is calculated for different currencies, the Euribor is only calculated for the euro.

We often talk about the Euribor, but this term can sometimes be confusing because there is not ONE rate Euribor but eight in all. The main current Euribor rates are 5. Each corresponds to a particular deadline: 1 week, 1 month, 3 months, 6 months and 12 months.

How is Euribor calculated?

Euribor has existed since 1999, the year of the introduction of the euro. It is used on the interbank market, ie an over-the-counter market in which only the banks, the European Central Bank, the national central banks, certain financing companies and certain credit institutions can intervene.

Every day, on the interbank market, banks in excess of bank liquidity lend to banks in demand for bank liquidity. For each loan is applied a different interest rate depending on the duration of the loan (from 1 week to 12 months).

To determine these different interest rates, a panel of several banks, all with an excellent reputation for solvency, offers Euribor's administrator, the European Money Market Institute (EMMI _¹ ), an individual assessment of these 8 interbank rates. These valuations are based on the liquidity needs of the market (ie the gap between supply and demand for money) in the euro area, but also on the basis of the level of inflation and the rate of growth. The choice of banks that must transmit their data to determine the Euribor is controlled by the governing board of the European Banking Federation (EBF).

Next, the EMMI excludes the highest and lowest values (the top 15% and below) in order not to influence the final result and calculates an average of the rates given by the different banks. This is called in jargon the fixing . It is sent every working day at 11:00 to all participating parties and to the press by the European Banking Federation.

Why is Euribor so well followed?

Euribor rates are closely monitored by both professionals and many individuals because they have direct implications for everyday life. Banks use them to calculate all kinds of interest rate products, such as savings accounts, term accounts and especially variable rate mortgages.

These are usually set based on Euribor rates at 3 months and 12 months. Thus, an upward or downward variation of these rates will directly influence the variable rate of your home loan. At these Euribor rates is also added the margin applied by the bank (also called line of credit). Depending on the bank and the type of real estate project, this margin can vary significantly between 1% and 4%.

Hence the interest of getting information from the various financial institutions before contracting a mortgage .

For more information, please visitwww.ing.lu/immoor visit us at the branch.

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1 .EMMI is a non-profit association established in Brussels.