Last year, the nearly seven-year period of negative Euribor rates came to an end. Since the Euribor rate determines the monthly loan installment, let’s take a look at how this affects existing loans and leasing agreements, as well as what additional costs one can expect to incur.
What is Euribor?
When you take out a loan from a bank or apply for a leasing, the interest rate specified in the loan agreement consists of two parts: the base rate and the mark-up rate. The mark-up rate is set individually for each bank customer. The base rate, on the other hand, has always been linked to reference rates, i.e. indices that reflect the price of money at which the bank borrows on the market. One of the most commonly used indices is the Euribor (Euro Interbank Offered Rate).
While the mark-up rate usually remains unchanged throughout the term of the loan, the base rate is reviewed and changed depending on the term of the Euribor rate (3-, 6- or 12-month Euribor) and the date of its change, as specified in the loan agreement.
The customers of SEB banka can easily view the term of the Euribor rate and the date of the next interest rate change specified in the loan agreement by opening the Internet Bank section Loans - My Loans and clicking on the relevant loan. This information is also available in the section More - Loans and Leases of the SEB Mobile App.
Why do Euribor rates change?
In an effort to curb the record inflation prevailing in the eurozone, on 21 July 2022, the European Central Bank (ECB) decided to raise euro interest rates by 50 basis points, or 0.5%. However, Euribor rates available on the market were already in positive territory before the ECB decision. Since the last summer ECB has increased the rates several times. By January of this year the 3, 6 and 12 month Euribor rates have increased to 2.298%, 2.858% and 3.370% accordingly.
Historically, Euribor rates have been positive on a regular basis. For example, the 6-month Euribor rate was 5.138% in July 2008. In the last seven years, however, Euribor rates have been negative.
How will loan payments be affected?
A negative Euribor rate basically means that borrowers only have to pay the individually determined markup rate when making interest payments. However, as Euribor rates are currently positive, most borrowers will have to expect an increase in their monthly interest payment at the next interest rate adjustment.
For example, if the markup rate is 2.5% and the base rate is 12-month Euribor, the total interest rate after the interest rate change will be 5.870% ( data as at 11 January 2023, when 12-month Euribor was 3.370%).
For a loan principal of EUR 100,000 EUR, a 1% increase in the total interest rate means that the monthly interest payment will increase by about EUR 50 (about EUR 600 per year). However, one should keep in mind that each case is different, as each customer has a different principal amount to be repaid, a different remaining term, and other factors that affect the monthly payment.
Also, the effective date of the new Euribor rate and the increase in the interest payment varies from case to case. In most cases, the "reference point" in the loan agreements is the date the loan was granted, and the base rate is reset according to the selected Euribor term - every 3, 6 or 12 months. Therefore, for some customers the interest rate has already been increased last year, while for others it will increase this year.
Be aware about the leasing payments
For leasing in standard cases a mark-up rate and base rate (3-month Euribor) is usually set. Leasing base rate change dates are: 15.01., 15.04., 15.07. and 15.10.
In case of leasing, an increased attention to the monthly payments should be paid by those customers, who have previously set up a standing order with fixed amount. When the interest rate changes, situations could arise when the previously set standing order no longer covers the monthly payment in full amount.
That’s why we advise to carefully follow whether there are any unfulfilled leasing obligations. This information is available in the SEB internet bank or SEB mobile app section Loans/Leasings – My leasings. If SEB internet bank is unavailable, SEB regularly sends information about leasing payments via e-mail.
To make the payment of leasing invoices as convenient as possible, we recommend creating e-invoice with automatic payment instead of a standing order.