In 2016 the European Commission announced the launch of a new method to measure interest on borrowed money: the “Euribor Plus”.
The transition to this new Euribor began in November 2019, after the definitive approval of the EMMI (European Markets Money Institute), and it is expected that it will come into force this same 2020 according to the 2016/1011 regulation of the European Union for the regulation of indices, European benchmarks with Sky Marketing.
Although it is still in the testing phase, many people are concerned about how the Euribor Plus will affect their old mortgages.
Initially, the application of Euribor 2020 should not imply a change of reference, although mortgages and loans may be affected: if their value is higher than that of the current Euribor, the installments of variable mortgages will become more expensive; if it is lower, these monthly payments will be lower.
In any case, to know how the Euribor Plus will affect mortgages it is important that before we try to explain what the Euribor Plus is, how it differs from the “old” Euribor and why the European Union has decided to make this change.
Euribor Plus: what it is, what it is for and how it differs from the current Euribor
Unlike the Euribor, which is the result of the interest rates that banks use to lend money to each other (neglecting 15% of the lowest values and 15% of the highest values), and whose calculation is carried out daily Through surveys (estimated value), the Euribor Plus is calculated on the real (and target) interest rate at which the money has been lent, including not only data from the main banks, but also from companies, public bodies, insurers or multinationals.
A priori, the Euribor Plus is not a new index as such, but an updated improvement of the formula that until now was used to establish the interest on loans. And since more data and references are included for this new calculation, the price of money can be established more reliably.
The new Euribor is expected to help set a more stable mortgage price: on the one hand, it wants to prevent banks from increasing or manipulating this index unilaterally; and, on the other, the participation of more actors in its calculation will facilitate the detection of anomalies or failures.
So, in principle, the Euribor Plus will be a less volatile and more real index.
However, this apparent transparency is not the only consequence of Euribor Plus 2020. According to some experts, the new calculation method, although it will not change the way mortgages work, may cause an increase in interest and, therefore, also in the that we pay for our mortgage .
Who is affected by the Euribor Plus?
The new Euribor Plus affects all variable mortgages referenced with this index, which represents around 60% of the mortgage loans in our country. These mortgages will continue to work the same, although banks will use another formula to make their annual or semi-annual updates.
The mortgages reference to another variable rate (such as IRPH, the rate of the Bank of Spain) and fixed mortgages they will not be affected by the change.
The forecasts for the Euribor 2020 are positive, although if you have a variable mortgage, it will be affected if this value acts negatively. It does not matter if you decide to change your bank mortgage: the Euribor Plus affects all entities because from the legal point of view it is not considered a change in the benchmark, but simply a change in the calculation methodology.
Can I change my variable mortgage to a fixed rate?
The only option so that the Euribor Plus does not affect you is to change your variable mortgage to fixed interest. It is clear that changes in the Euribor should not be the main reason for making this decision, although they can be an incentive.
With the new Mortgage Law , many entities have eliminated the expenses for novation or subrogation, although some banks may charge you to pass your mortgage at a fixed rate. According to this Law, the maximum commission will be 0.25% during the first 3 years of the life of the mortgage loan. Afterwards, the change will be free.
What does the arrival of Euribor Plus mean for the mortgage market?
Theoretically, the Euribor Plus is a more objective and real value than the old Euribor. However, this does not necessarily mean that it is more beneficial to consumers.
After the 2008 crisis, the Euribor has fallen (from its maximum value of + 4.89% that year we went to -0.190% in 2017), which has benefited people with variable mortgages. Obviously, these types of loans have more risk, but they can be much more profitable.
But how does the new Euribor fit into the current economic situation? How will it be calculated and how will it affect the mortgage market?
For years the economy has been weak. This, together with the fall in oil prices, has led to the need to adopt expansionary economic policies to “lower” the price of money, and this has been reflected in cheaper mortgages.
The current reality of the Euribor
Now the situation has changed. In recent months and after the COVID-19 crisis, the Euribor has risen and is increasingly close to positive values (we have gone from -0.253% in January 2020, to -0.288% in February, to -0.266% in March and -0.108% in April, down to -0.081% in May 2020). What is the reason? Basically, banks are distrustful of both individuals and other banks, and this raises the price of loans.
After several years of tests and studies, the Euribor Plus applicable from 2020 will be calculated as follows: supported by technology, the interests of all types of money loan operations that are carried out in real time are recorded, including, in addition to those of the banks themselves, those of insurance companies, pension funds or public institutions.
In order for the data to be as reliable and detailed as possible, all entities must send daily the interest applied to interbank operations of more than 20 million euros carried out the previous day. These figures will be used to calculate the Euribor Plus interest in different terms (one week, one month, three months, six months and 12 months). Typically, mortgages work for twelve months, although some are reviewed semi-annually.
The Euribor Plus 2020 will have an immediate effect on mortgages because the price when contracting them can change a lot from one month to another due to the fluctuation of their value in just 24 hours.
The other aspect that worries users is how it will affect them if their mortgages are updated according to the Euribor Plus, which in principle will begin to be applied positively. This can be a disadvantage because the current Euribor is negative, which means that mortgages will be more expensive, at least at the exit.
In any case, we will have to wait to see the real effects of Euribor Plus on old and new mortgages.
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