ECB rate hike troubles mortgage holders

Households face a 50-euro increase in the monthly tranches of their floating-rate mortgages as a result of the 75-basis point hike in the basic European Central Bank interest rate that led to the rise of the 3-month Euribor to 0.816%.

The increased installment is compared to what households paid when the Euribor was at zero levels, that is from mid-July onward, when the ECB announced the first increase in interest rates by 50 basis points.

Since then the 3-month Euribor, on the basis of which the majority of both housing and business loans are priced, has been steadily increasing, reaching 0.816%.

Given that forecasts raise the 3-month Euribor above 2% by the end of the year – according to estimates it will reach 2.05% – the burden of the monthly installment for an average mortgage, e.g. 100,000 euros and with an initial interest rate of 3%, is expected to exceed 100 euros and, depending on the repayment period, reach up to 110 euros compared to the installment paid in July.

These are loans that have shrunk in the last five years, for which most of the tranche concerns the interest, making these borrowers the big losers of Thursday’s interest rate hike.

For small businesses, the increase in the 3-month Euribor from mid-July translates into a charge of around €80 per month for an average loan of €200,000 with an initial interest rate of 5.50%, but it will exceed €200 if the Euribor reaches 2%, as the forecasts say. An even bigger rise of up to 2.50%, which is the forecast for next year, means that the increase in the monthly installment for the same loan translates to around €260 and is a significant burden for a small business, which already faces increased operating costs.

The burden from the rise in interest rates is currently manageable for households that carry loans from the past, e.g. from 2005 to 2008, and have been consistent in their obligations in previous years. These borrowers have avoided rearranging their loans and therefore extending the repayment period of their debts.

These loans have completed the interest payment period, so the borrowers are the big beneficiaries of the period of low interest rates, since they have taken a loan with zero interest and a low spread.