All those who have mortgage debts, or who are soon to be hired, are constantly aware of the fluctuation of the Euribor. However, the technicalities employed in most articles assume “expert level” in readers. For this reason we have thought of explaining in an article in simpler language, what is the Euribor, how it is calculated and how it is related to mortgage loans .
What does the Euribor index refer to?
The word Euribor is short for the European Interbank Offered Rate. This index refers to the interest rate that identifies each other in a group of European banks. More specifically, it is an index that collects the average of the interest rates imposed on unsecured funds, which are lent to a group of banks selected to others. The loans are short term.
Why does the value of the Euribor fluctuate?
Being clear that Euribor rates are based on financial agreements carried out by a list of European banks, we can account for the level of these rates determining the supply and demand of this financial market. The index of course receives a direct impact from the banks’ money pricing policy and from other factors such as economic growth and the inflation rate. Interbank loans are not the only mechanism that banks have to acquire funds, have you taken into account that in savings accounts, what the saver really has is to lend their money to the bank?
Therefore, if less money circulates in the market, the price of the Euribor rises due to the shortage of the moment. If, on the other hand, if money flows from one bank to another with ease, the Euribor with difficulties downwards. Another point of view is that if banks perceive a low risk in lending money, the index falls. If they perceive a greater risk, the price of money rises and the Euribor also.
As we have mentioned before, many macroeconomic factors affect the value of money, including the price of oil or the stability of the stock markets. For this reason, it is difficult to anticipate the change in this interest rate with certainty.
Which banks make up the European panel?
Currently, the number of banks that report the interbank interest rate at which money is lent is 20 institutions. The entry and exit of institutions to the panel of selected banks is controlled by a supervisory commission of the Federation of European Banks. Likewise, the body that calculates and publishes the average interest is the European Monetary Markets Institute (European Money Markets Institute, EMMI). These banks handle the largest volume of business in the euro zone money markets.
Is there one or more Euribor rates?
Often when we talk about Euribor we have the impression that there is only one interest rate. This idea is completely wrong. As well as the money can be lent to different terms of maturity, the interest and the Euribor according to the term of the loan. Prior to November 1, 2013, Euribor rates frequently had fifteen different maturities: weeks (1, 2, and 3 weeks); months (1 to 11 months) and up to a year. As of that date, the Federation of European Banks suspended the setting of the Euribor for maturities of 3 weeks and 4, 5, 7, 8, 10 and 11 months. Thus reducing the Euribor to 8 rates according to the maturities corresponding to 1 and 2 weeks and 1, 2, 3, 6, 9 and 12 months. Thus, when we refer to the Euribor and how much it is, the correct thing to do is to indicate the maturity: saying, for example, that the 9-month Euribor is 0.14%. You must always bear in mind that all Euribor rates are quoted annually, that is, it is expressed as a percentage of annual yield. Normally the Euribor rate that is used as a reference for mortgages is the 12-month maturity. Finally, the overnight rate for loans of funds between banks is not contemplated in this index, and it constitutes an independent index that has been called Eonia.
How is the Euribor calculated?
Euribor interest rates are calculated daily when the 20 banks that belong to the panel provide data on the interest rate at which they lend to other banks. Then the European Monetary Institute Markets, performs the calculation of the simple arithmetic mean from the selected data , after removing 15% of the highest values and 15% of the lowest.
Finally, he rounds the result to three decimal places. Before March 3, 2014, the Euribor can be consulted in real time, from that date, the European Banking Federation charges for accessing the data, and after 24 hours the data is made public for free. The average monthly rate is calculated through the daily rates accumulated in the month and divided by the number of days of the month on which the indicator has been listed. This rate is published on the first day of each month.
Why does the Euribor have negative values?
A negative Euribor rate means that the interest rate is negative; Instead of paying interest when borrowing money, you receive payment for borrowing money . It is not “free money” rather, it is because it is cheaper to pay someone else to use your money than to leave it static.
The reason why rate values are negative is closely related to the rate offered by central banks, in this case the ECB. Lately, they have implemented the policy of offering negative rates as a measure to boost the economy. The easier it is to access capital, the more stimulus there will be. But sometimes even 0% interest rates are not enough, which is why central banks rarely negative.
Why is the Euribor important?
Funds from interbank loans are used in the granting of loans with home equity guarantee to third parties. Euribor rates are important because they affect a base for the interest rate or the price of all types of financial products, including savings accounts, mortgages and as interest rate swaps, among others. Thus, in many European countries, and in Spain more than 90% of mortgages, the interest rate payable follows the Euribor rate. When the Euribor rate increases, the interest to be paid also increases and vice versa. In the event that the mortgagor had opted for a mortgage based on a variable interest rate, it is understood that their payments will be adjusted to the average monthly rate of daily values of the Euribor (often the 12-month Euribor rate) plus a fixed commission. Hence, what we see reflected, for example, Euribor + 1%.
If we wanted to know what interest rate would be paid for a loan assigned to Euribor at 12 months + 4%, we could add the interest rate published for a maturity of one year and 4% of the principal, for the day it is completed or the loan is reviewed. If the Euribor rate is negative on that day, most loans and mortgages will use Euribor = 0 as the benchmark rate, so the resulting interest rate could be the base rate of 4%.
In countries outside the euro zone, such as the United States and Great Britain, the Euribor is not used as a reference, but other interest rates such as LIBOR (London Interbank Of Offer Rate).
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