The difference between the one-year Euribor and the three-month Euribor grew to a historic high on Wednesday. What does it mean for mortgage borrowers?
In the interest rate market something confusing happened on Wednesday. The most popular reference interest rate for Finnish mortgages, the 12-month Euribor, continued to fall and settled at 3.554 percent. At the same time, the shorter three-month market rate was quoted at 3.925 percent.
The numbers themselves are not terribly exciting, but there is news hidden in them. The interest rate difference became historically large on Wednesday. What makes it news is that the short-term interest rate is now historically expensive compared to the longer one-year interest rate.
The interest rate gap is now 0.371 percentage points. The previous record was from November 2001, when the difference was 0.356 percentage points.
Why should you be interested in this?
The widened gap indicates that the market believes that the European Central Bank (ECB) will soon start easing its monetary policy. That would mean that the Euribor, which regulates the interest rate for mortgage borrowers, would also decrease. The 12-month euribor in particular has already fallen rapidly far from its peak at the end of last September, and the rapid decline may continue if the market is to be believed.
President of the ECB Christine Lagarde said in mid-December after the central bank's interest rate meeting that the ECB is not yet satisfied with the slowdown in inflation. At the same time, he said that interest rate reductions were not even discussed at the meeting.
The alignment was tighter than expected. It may mean that the central bank will not start lowering interest rates at least in the first half of next year.
Fair have not bought the message at all. It can be seen not only in the development of the Euribor, but also in the behavior of interest derivatives that predict their future development.
On Wednesday, for example, the 12-month Euribor was estimated to drop to around 2.2 percent in a year's time. Just a month ago, the one-year Euribor was estimated to be over 3 percent at the end of November 2024. Expectations regarding the three-month Euribor have also developed in the same direction.
At this point, it should be reminded that expectations regarding the development of interest rates should be treated with caution, as estimates regarding interest rate developments have often proven to be incorrect in recent years.
Big up the increased interest rate difference also gives cause for reflection to those who are considering signing a new mortgage or changing the reference interest rate.
Is short interest still a reasonable choice, even though long interest is clearly cheaper right now?
A short interest rate is a particularly attractive option in a situation where interest rates are falling, because then, for example, those who tied their loan to the three-month Euribor can update their interest rate downwards every three months.
Let's illustrate the matter with an example. Example customer Alpertti tied his home loan taken out a couple of years ago to one year's Euribor. The interest rate review date for his loan is September 29. This year, Alpert was unlucky, because on September 29, the euribor for the year was at 4.228 percent, i.e. the highest it has been in years. If Alpertti does not change the terms of his loan, he will pay the relevant interest until September 29, 2024.
Example customer Adelmiina, on the other hand, tied her loan taken on September 29 to the three-month Euribor. At that time, it was at 3.952 percent. At Adelmiina, the next interest rate review day is coming up on Friday. It is likely that his rate will decrease slightly from September. It is still clearly more expensive than, for example, Aukusti, whose loan was tied to one year's Euribor on Wednesday, but clearly cheaper than Alpert.
If interest rates continue to fall rapidly, it is possible that Adelmiina's interest rate will already be lower than Aukusti's in June.
Of course, the same works in the other direction. If interest rates were to suddenly turn upward, the short-term interest rate would be revised upwards more often, which would again increase interest expenses.
The popularity of the three-month Euribor has grown rapidly since interest rates turned to a rapid rise in early 2022. At that time, practically all loans were tied to one year's Euribor. Of the new loans signed in October, already one in three was tied to the three-month Euribor.
In the light of historical data, the short interest rate is the cheapest option, as the three-month Euribor has been lower than the one-year Euribor for most of the 2000s.
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