Comment|The one-year Euribor has already fallen historically much lower than the three-month Euribor. A mortgage debtor should still seriously consider switching to a shorter interest rate, writes Joonas Laitinen, head of financial services at HS.
Housing debtors are having a wonderful ride right now. If two years ago the interest rates were climbing up at a steep slope, now we are coming down the barrel. Since the beginning of June, for example, the one-year euribor preferred by Finns has fallen by almost 0.8 percentage points.
Now the reference rate in question is already below three percentage points. On Wednesday, it crawled again to new lows of the year.
Today, Thursday, there will be more nanna when the European Central Bank (ECB) says it will likely reduce its key interest rates by 0.25 percentage points.
From the point of view of debtors, the most important question is what the ECB will do next.
On the market it is expected that the ECB will lower its key interest rates very aggressively during the year. This is evidenced by, among other things, the fact that the three-month Euribor is expected to have dropped to less than two percent in a year’s time. It is estimated that the Euribor for the year will remain slightly higher. Estimates are based on the pricing of interest rate derivatives.
In practice, the three-month Euribor predicts quite accurately the level of interest on the ECB’s banks’ overnight deposits. It is the ECB’s main policy rate. A drop in the three-month Euribor below two percent would mean that the ECB would lower its deposit rate from 3.5 percent to 2 percent. In practice, there would be seven interest rate cuts including today’s drop by the end of next year.
It is still impossible to predict whether the interest rate cut forecasts will come true, because many things affect the ECB’s operations. The key is, for example, how inflation and economic growth in the euro area develop.
Despite the uncertainty, interest rate cut expectations are already having practical effects. On Wednesday, the gap between the one-year Euribor and the three-month Euribor increased to more than 0.5 percentage points for the first time in Euribor’s history. On Wednesday, the one-year euribor was recorded at 2.96 percent and the three-month euribor at 3.467 percent.
The difference should not be exaggerated, but it is still big. For example, in the case of a 300,000-euro home loan, the monthly interest expenses of a person who tied their loan to one year’s Euribor are almost 130 euros higher than those who tied their loan to three-month Euribor. Personal margin is not taken into account in the calculation.
The increase in the difference indicates, in addition to the acceleration of interest rate decline expectations, that we are now living in exciting times in the economy. Attention is focused especially on the world’s largest economy, the United States, where recession fears have grown. The US central bank (Fed) is also expected to rapidly lower its key interest rates. The expectations of the Fed are now also reflected in the expectations of the ECB’s actions.
What should the mortgage debtor think about all this now? In this situation, for example, does it make any sense to switch from the 12-month Euribor to the three-month Euribor if the interest rate revision date is just around the corner?
There is no final truth to the question, but you should at least think about these things before making a decision.
The annual euribor has decreased by more than 1.1 percentage points. It means, for example, in the case of a 300,000-euro mortgage, that interest expenses will drop by more than 3,400 euros per year if the Revision Day falls on a Wednesday. That’s already quite a noticeable decrease. The security-seeking choice is to settle for this savings and lock in the interest rate for a year ahead.
The one-year Euribor has now been more than 200 banking days lower than the three-month Euribor. It is an exceptionally long time. The longest one-year Euribor has been lower than the three-month Euribor in 2000–2001. At that time, the three-month Euribor was higher than the one-year Euribor for no less than 270 banking days in a row.
However, in the light of history, the current situation is an exception that will very likely end at some point. Based on the derivatives market, the turnaround is very close. It means that from the point of view of a risk-tolerant debtor, switching to a shorter reference rate can be profitable. In the case of a shorter interest rate, an interest rate review occurs every three months, when falling interest rates cut housing costs more quickly.
A person who locked his loan to one year’s Euribor with Wednesday’s quote would pay 8,880 euros a year in interest for a 300,000 euro home loan. Personal margin is not taken into account in the calculation. Those who choose the three-month Euribor, on the other hand, would pay more than 560 euros less in interest per year. The calculation is based on Wednesday’s interest rate quotation and current interest rate expectations, it also does not take into account the costs that may arise from changing the interest rate. Larger banks charge 100–300 euros for the exchange.
A rough example calculation shows that short-term interest is quite clearly a more profitable option if interest rates really fall in line with current expectations.
So far, Finns are not convinced of the greatness of short interest rates. In July, only one in five new mortgages was tied to the three-month Euribor.
From the point of view of the debtors, the situation is comforting to the extent that in the current situation it is difficult to run very badly into the woods. It is mainly about how well the current situation can be optimized.
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