Euribor, an interbank lending rate that affects interest payments, is set to rise by 1% this year, by 2% in 2023 year and remain at a similar level at least until 2032.
According to the Bank of Lithuania, the Euribor hike is expected in mid-summer. It will be felt by almost all residents of the country who have a mortgage – 98% of them have their interest rates recalculated every three, six or 12 months, according to the bank.
Those who have a loan with a 12-month Euribor rate are already paying more after the interest recalculation.
In mid-May, the 12-month Euribor was 0.31%. This means that Euribor has to be added to the bank’s margin when the loan is recalculated. If a person has a loan of 100,000 euros for 30 years at a 2% interest rate, they have been paying 369 euros per month to the bank so far. With a 0.31% increase in Euribor, the monthly payment has increased by around 16 euros and will now stand at 385 euros.
With markets expecting the six-month Euribor to reach around 1% as early as December and 2% until the end of next year, LRT has calculated the amount or monthly repayments may change.
If a person has a 100,000-euro loan for 30 years at 2% interest, the monthly payment to the bank is currently around 370 euros. If Euribor rises to 1% at the end of the year, the monthly payment will increase to 420 euros. If Euribor rises to 2%, the monthly repayment will go up to 478 euros at the end of 2023.
For those with a 150,000-euro loan for 30 years at a 2% interest, the monthly payment will increase from 555 to 632 euros if Euribor rises to 1%. If it rises to 2%, the monthly repayment will be 716 euros.
For those borrowing less – 50,000 euros for 30 years at a 2% interest – the monthly payment will increase from 184 to 210 euros when Euribor rises to 1% and 238 euros when it rises to 2%.
The markets predict that Euribor will be around 2% for the next 10 years until 2032.
However, countries outside the euro area have already raised their interest rates by more than 2%. In the Czech Republic and Poland, for example, the base rate is above 5%. If the European Central Bank follows suit – which is unlikely – the monthly payment on a 30-year, 100,000-euro loan will almost double from 370 to 665 euros.
According to the Bank of Lithuania, one of the ways to hedge against possible interest rate fluctuations in the future is to opt for a fixed, rather than a floating, interest rate.
However, even if the fixed interest rate remains unchanged, people are likely to pay more than with a floating rate.
“There is a price to pay for this hedge – normally, the fixed rate offered by banks is higher than the floating rate at the time, and the longer the fixed rate, the higher the difference can be,” Milda Stankuviene, chief economist at the Bank of Lithuania’s Macro-Prudential Policy Division, said.
In March, the average interest rate on a 5-10 year mortgage loan was 6.03%, while Euribor is only expected to be around 2% for the next 10 years.
Moreover, banks operating in Lithuania do not offer a fixed interest rate for more than 10 years.
“Choosing a home loan with long-term variable interest rates – fixed for a limited period, rather than for the entire term of the contract – reduces the risk of interest rate increases for a limited time,” said Stankuviene.
“For the remainder of the loan period, the lender can offer a much higher interest rate than the one before,” she added. (LRT/Business World Magazine)
