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Before entering signing a deal of buying your new home in Spain and the mortgage to finance it, a frequent question arises: what is the Euribor and how can it affect my monthly payment?

 

What is Euribor?

The Euribor is probably the most followed and well-known financial indicator on the market. Many mortgagees closely monitor its evolution, since it marks the monthly fee they will pay to the bank for their loan.

The Euro InterBank Offered Rate, better known as Euribor, is the benchmark index of the interbank market of the eurozone or, in other words, the price at which European entities operate with each other. But, in addition, it is the most used indicator in Spain to calculate the revision of variable interest rates of mortgages, according to data from the Bank of Spain.

 

How is the Euribor calculated?

The calculation of the Euribor could be simplified as the average of the interest rates of the daily supply of a panel composed of about twenty reference banks, from which the highest and lowest rates are excluded to eliminate deviations. These entities communicate their data daily to the European Money Market (formerly called the European Banking Federation) and after the calculation of their average they are published daily. The monthly closing of the 12-month Euribor is the one that is taken as a reference for the calculation of mortgages.

It is important to know that, although we always talk about euribor (dry), there is not just one index. There are five types of euribor indices: 1 week, 1 month, 3 months, 6 months and 12 months. And it is the latter that is used as an indicator in variable rate mortgages.

 

Mortgage and Euribor: How does it affect?

In variable rate mortgages, the interest paid to the entity is not fixed for the duration of the loan, but in most cases is linked to the behavior of the 12-month Euribor. Thus, the monthly fee consists of the part of the requested money that is being returned to the entity, plus the interest generated with the applicable Nominal Interest Rate (TIN), the calculation of which is made with the one-year Euribor plus the differential set by the entity.

 

Hence, that the fluctuations of the Euribor, both upwards and downwards, are closely monitored by many mortgagees, since the amount to be paid will depend on this evolution, when the mortgage review takes place, which is usually annual and, in some cases, semi-annual.

 

For example, if the Euribor was at 2% and the differential was 1%, the TIN would be 3%. If the Euribor fell to 1%, the TIN would become 2%, and the monthly mortgage fee would decrease until the next loan review took place.

 

Therefore, those who have a variable rate mortgage should be aware of the evolution of the Euribor and the consequent effect it can have on their mortgage when they have their next review.

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