What does the increase in the Euribor rate mean for the borrower?

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Rapidly rising prices are pushing Euribor up. According to Lenno Uusküla, chief economist at Luminor, this means that, on the one hand, loans will become more expensive for consumers, and, on the other hand, the overall rise in prices for goods and services will slow down.

Euribor is the interest rate at which European banks lend money to each other. It is also known as the money market rate. The increase in Euribor will affect a large number of borrowers in Estonia, as a significant portion of loans, including home loans and leasing, are mainly pegged to the 6-month Euribor rate. The duration of the loans themselves is usually much longer. The current negative Euribor is forecast to rise to 1.3% by the end of next year.

Luminor Chief Economist Lenno Uusküla explained that how much interest rates rise in the coming years will depend on price increases in the Eurozone: As prices continue to rise, the ECB will also raise interest rates to keep prices in check Rising energy and commodity prices have pushed euro area prices up 7.5% over the past year.

Rising interest rates make home loans more expensive, so fewer people take out loans. “This, in turn, reduces the amount of money in the economy, which leads to other prices falling, because if less credit is taken, then the demand for goods and services falls,” Uusküla explained. For example, if the Euribor rises from the current level to 5%, then a loan of 100,000 euros taken for 20 years will increase the monthly loan payment from 505 euros to 775 euros.

According to Uusküla, the rule of thumb is that a 1% increase in interest rates will increase the monthly payment on a €10,000 loan by about €5. So, for a loan of 100,000 euros, a 1% increase in interest rates means an increase of about 50 euros.

“However, it should be borne in mind that, as a rule, wages rise along with prices, which means that the ratio of loans already taken to income decreases, which at the same time makes it easier to repay the loan. The price of real estate also increases with time,” said the chief economist.

In addition, Uusküla noted that since the introduction of the euro in 1999, the highest 6-month Euribor rate was 5.5%.

Source: https://www.dv.ee/ by www.dv.ee.

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