What is Euribor and how does it affect you?

Have you ever taken out a loan or mortgage in Europe and wondered what that Euribor rate is all about? If so, you’ve come to the right place. In this post, we’ll break down exactly what Euribor is, why it’s so important, and how it impacts your financial life.

What is Euribor?

Euribor stands for Euro Interbank Offered Rate. It’s a benchmark interest rate that banks use to lend money to each other within the eurozone. Essentially, Euribor indicates the rate at which eurozone banks are willing to offer euro deposits to other banks.

There are different Euribor rates depending on the length of the loan term. The most common ones are Euribor 3m (3 months) and Euribor 6m (6 months). The higher the Euribor rate, the more expensive it is for banks to borrow money from each other.

Why is Euribor important?

The Euribor rate is crucial because it influences the cost of borrowing for individuals, companies, and even governments within the eurozone. When the Euribor rate goes up, interest rates on mortgages, car loans, business loans, and more also tend to go up. The opposite happens when Euribor declines.

Over 90% of household mortgages in the eurozone are variable rate, meaning they are tied to benchmarks like Euribor. As such, the Euribor rate has a huge impact on monthly mortgage repayments and affordability. It literally determines how much people pay to live in their homes!

How does the Euribor affect my mortgage?

If you have a variable rate mortgage, changes in the Euribor rate directly influence your monthly mortgage payments. For example, say you took out a €200,000 mortgage over 25 years at an interest rate of Euribor + 1.5%.

If the 6-month Euribor rate is 4%, your interest rate would be 4% + 1.5% = 5.5%. Your monthly payment would be around €1,135.

But if Euribor rises to 5%, your new rate becomes 6.5% and your payment jumps to €1,311 per month – a difference of €176! And that’s just for a 0.5% increase in Euribor. Larger moves can raise or lower mortgage payments by hundreds of euros per month.

Euribor 6m

The 6-month Euribor rate is the most widely used for variable rate mortgages and loans. It reflects the rates at which banks lend to each other for a 6 month period.

As of January 20, 2023, the Euribor 6m rate stands at 3.863%. This is up from -0.498% a year ago, reflecting rising interest rates across Europe. The 6m rate has been on an upward trend for over a year now as the European Central Bank battles inflation.

Euribor 3m

The 3-month Euribor acts as a benchmark for rates on shorter term loans between banks. It is similar to the 6m rate but reflects lending activity for 3 month periods instead of 6.

Right now the 3m Euribor stands at 3.983% as of January 20, 2023. It is typically around 0.1 to 0.2% higher than the 6m Euribor. The 3m rate is also rising as the ECB tightens monetary policy.

How is the Euribor calculated?

Unlike some other benchmark rates, the Euribor is not set by any central authority. Rather, it is calculated directly from the rates submitted by a panel of over 30 major banks.

Every day, these banks report the rates at which they think they can borrow euros from other banks for various periods. The Euribor rates are then determined by taking the average of the middle 15 rates submitted by the panel. The top and bottom rates are discarded.

This calculation method makes Euribor a real market rate reflecting actual interbank lending activity. It adjusts based on supply and demand between financial institutions.

Current rates and rising trends

Euribor rates have surged over the past year after being negative for many years. Here are the latest Euribor rates as of January 20, 2023:

  • Euribor 1 month: 3.863%
  • Euribor 3 months: 3.983%
  • Euribor 6 months: 4.113%
  • Euribor 12 months: 4.194%

The European Central Bank has been aggressively raising interest rates to fight inflation in the eurozone. This has pushed up short-term interbank lending rates, driving Euribor higher across all maturities.

Experts expect the upward trend in Euribor to continue through 2023 as the ECB maintains its tightening cycle. This means variable-rate mortgages and loans will keep getting more expensive for eurozone consumers in the near term.

Is Euribor relevant outside the European Union?

Given that Euribor reflects the rates at which banks lend euros to each other, it is primarily relevant for countries within the European Union. EU member states like France, Spain, Italy, and Germany all use Euribor extensively in their financial systems.

However, Euribor also has some limited use and recognition in financial centres outside of Europe. A few examples:

  • In Singapore, some home loans and business loans benchmark rates against Euribor instead of local benchmarks.
  • Euribor is sometimes used in forex and derivatives contracts worldwide to price products tied to the euro.
  • Some banks in the UK offer Euribor-based mortgage products to appeal to expatriate European customers.

So while Euribor is not universally relevant globally, it does pop up outside of Europe in specific contexts. But its core importance remains centered around the EU.

Is Euribor being replaced?

In recent years there has been talk of replacing Euribor with a new benchmark called the Euro Short-Term Rate (€STR). However, Euribor has been reformed rather than replaced – at least for now.

Here’s what happened: in 2019, regulators overhauled the way Euribor is calculated and administered to make it more reliable. Panel banks now submit rates based on actual transactions rather than estimates. This makes Euribor far more grounded in real data.

Given these reforms, Euribor has avoided being phased out. The benchmark is now considered resilient enough to continue serving as the main interest rate benchmark for the euro.

What is €STR and is it relevant?

The Euro Short-Term Rate (€STR) is a new interest rate benchmark launched in 2019. It reflects the wholesale euro overnight borrowing costs of banks located in the euro area.

The €STR is published by the ECB and is seen as a robust and reliable benchmark. However, it hasn’t replaced Euribor – it serves a different niche. The €STR is mainly used for derivatives and financial contracts tied to daily overnight lending rates between banks.

For longer term rates like mortgages and business loans, Euribor remains the preferred benchmark for now. So €STR hasn’t had a direct impact on consumers yet. But it stands ready to gain greater adoption if Euribor ever does get phased out down the line.

What is the prediction for Euribor in 2023?

Most economists forecast that Euribor will continue rising in 2023 as the ECB maintains a aggressive tightening stance against inflation. The exact path will depend on how quickly the ECB hikes rates and whether inflation starts cooling down later in the year.

In their latest projections, Deutsche Bank analysts see the 3-month Euribor ending 2023 at around 3.31%. The 6-month Euribor is expected to be near 3.38% by year-end.

If these predictions hold true, Euribor could be double current levels by the end of 2023. That would make borrowing much more expensive for European households and businesses.

Of course, forecasts can change quickly depending on economic developments. But the clear trend for Euribor is upward in the near term. Consumers with variable loans and mortgages should brace themselves for higher payments.

Final Thoughts

I hope this breakdown gave you a better understanding of Euribor – what it is, why it matters, and how it impacts loan costs in the eurozone. While not a household name, changes in Euribor have a huge effect on the affordability of mortgages, car loans, and other consumer financing.

Now you can keep an eye on Euribor rates and know how they may affect your monthly payments. You can also make more informed borrowing decisions when taking out new variable rate loans. Understanding benchmarks like Euribor helps us all become savvier consumers!