Euribor rates have been rising since the end of last year, and no one knows how far they can go. For families with mortgages, this is an excruciating headache, resulting in a significant increase in mortgage payments.

A year ago, for example, a mortgage loan of 100 thousand euros for 30 years, indexed to the 6-month Euribor rate (at the time of trading at -0.53%) and with a spread of 1.5%, gave a monthly payment of 320 euros. Today, when the 12-month Euribor is 0.67%, the payment on a mortgage loan reaches 378 euros. This is an increase of 50 euros per month, which is equivalent to more than two old payments per year, which must be paid into the family budget over the next 12 months until the rate is revised again. And the worst thing is that bad news should not stop there.

The period of low and negative interest rates that we have been living through for so long does not promise to return. On the other hand. The growth of Euribor rates in the coming years is no longer something unknown.

Currently forward rate agreements (financial contracts traded on the secondary market that allow you to set an interest rate in the future and are used by professionals to predict interest rate fluctuations in the long term) on the 6-month Euribor indicates that in November the rate exceeds the 1% line, could reach 1.5 % by 2026 and in less than 10 years will be trading above 2%.

The next few years will come with a lot of stress for the portfolio of Portuguese families. Especially for those who have not taken precautions against rising interest rates. However, this is not the end of the world. There are several solutions to reduce the burden of mortgage loans on the family budget.

1. Amortize the loan

There are several ways to reduce your mortgage, but none is more effective than reducing your bank debt.

For example, if your mortgage is indexed to the 6-month Euribor (currently at 0.67%), it has a spread of 1.5%, it will only repay over 20 years, and the amount you still owe bank, is up to 100,000 euros, the depreciation of 30,000 euros immediately increases the installment from 514 euros to 360 euros.

However, it is important to consider the cost of this operation. Since this is a variable rate indexed mortgage, it requires a prepayment fee which can range from 0.5% (in the case of variable rate contracts) to 2% (in the case of fixed rate contracts). on depreciated capital.

Mortgage amortization is thus the best investment families can make at any time. Especially when rates are preparing for further growth: in addition to the ability to immediately reduce the installment plan and the amount of interest payable during the term of the contract, it immediately unloads the monthly budget in the same proportion as debt cancellation. The only downside is that for this you need to have liquidity to repay the debt.

In the case of more organized and “savvy” families, this should not be a serious problem, given that for more than a decade Euribor rates (for all maturities) have been falling sharply, and since February 2016 have even gone into negative territory. which allows you to increase your savings.

In case the piggy bank is empty, the solution that needs to be considered to mitigate the impact of the interest rate hike is to extend the term of the loan.

2. Extend term

It is true that postponing a problem until later is not a good practice. However, in the case of a home loan, by extending the term of the contract, families are currently gaining slack in their budget.

For example, if you have 20 years to pay your mortgage and currently have a balance of €100,000, the monthly payment is €514, assuming it is indexed to the 6-month Euribor rate (0.67% ). and a spread of 1.5%. When extending the term of the contract for another 10 years, the installment plan goes up to 378 euros, that is, it decreases by 26.5%.

The disadvantage of extending the term of the contract is that in this case the final balance of interest payable will be higher. This means that as the number of years of the loan increases, despite creating more savings now, in the long run the total cost of the loan ends up increasing as the period over which interest is charged increases.

The mortgage renewal process also depends on the age of the loan holder. Currently, most banks require the contract to expire before the holder is 75 years old. However, there are people who admit that they live up to 80 years.

3. Trade new spread

Banks remain very competitive in the home loan market. According to the Bank of Portugal, from July last year to June this year (latest available data), the volume of mortgage loans issued by banks grew by an average of 4.5% per month on an annualized basis. It has been more than 10 years since such massive growth occurred.

The firm commitment of banks to providing home loans is also felt in the spreads they charge on contracts. Based on the prices of ten major banking institutions (accounting for over 95% of the home loan market in Portugal), the average minimum spread applied for new floating rate contracts is currently below 1%. According to the Bank of Portugal, this is three times lower than the average spread of new Euribor-indexed contracts for 3, 6 and 12 months spent in 2012.

If your home loan agreement has a spread above 1% (if you bought a house between 2011 and 2018, it is highly likely that this is the case for you as well), it is worth listening to what the market has to offer. One tenth less on a mortgage loan of 100,000 euros for 30 years results in a difference of 60 euros per year.

Don’t get too convinced about the first offer you get. Try to use this offer to your advantage by first putting pressure on your bank to lower the spread and then on other banks to offer you an even more competitive solution.

Among the price lists collected through the website of ten major banks, Bankinter stands out the most as it has the lowest minimum spread on the market: 0.9%. However, if you are already thinking about chasing this offer, remember that what is more important than signing up for the offer with the lowest spread is the APR (global effective annual payment rate) that you should pay attention to, because that it is on it that the total cost of the loan lies (including installments, bank commissions and insurance).

In addition, in the case of transferring a loan to another financial institution, it is necessary to understand whether this change entails any costs for you. Some banks bear all the costs of transferring a mortgage loan, but not all. Pay attention to some of these costs: the fee for early repayment, the opening of the process, the valuation of the property, the execution of a new contract, the new deed and all related taxes (stamp duty on the transaction and on the loan, and the Board on onerous transfer of property). (BMI).

Next minimum spread 1%

Strong competition from banks in the provision of mortgages is visible due to the close proximity of the offer of minimum spreads, with a focus on Bankinter, Banco CTT and Montepio, which already practice rates below 1%.

Source: Unreliable banks have been operating since August 3rd.

4. Change insurer

The cost of a mortgage loan is much more than a mortgage payment. It also aggregates the costs of life insurance (protects credit holders in the event of death or disability), multi-risk insurance (protects property from possible damage it may suffer) and other costs associated with products that have been subscribed to receive a bonus. . distribution.

Thus, renegotiating insurance conditions can be a way to significantly reduce the cost of a home loan. However, it is necessary to coordinate the change of the policy with the bank to ensure that the change of the life and/or multi-risk policy does not lead to an increase in the spread.

Life insurance is usually what has a higher cost at the end of the month. In addition, it becomes more expensive as credit holders age. So, start by discussing your life insurance policy. Find an insurance intermediary to help you find the most cost-effective solution, or request a simulation of your case directly from insurers. It will not be difficult to get a 30% savings when you renegotiate life insurance terms.

5. Rethink financial products

Last year alone, more than 35 thousand mortgage lending agreements were renegotiated, which is 17% more than in 2019 and 36% more than in 2021. According to the Bank of Portugal, “out of the revised terms carried out in 2021, 29.6% changed only the grace period for capital and 11.5% changed the spread and other terms at the same time with a financial effect.”

Data Bank of Portugal also show that 18.9% of the revised terms changed more than two financial terms, and 18.6% had the sole purpose of changing other contract terms with a financial effect (other than spread, term, capital grace periods or interest rate type), which may include, for example, changing an index or setting a lower fee for a limited period of time or reducing the cost associated with certain products such as debit cards and credit and account maintenance fees.

Everything can be negotiated when reviewing a home loan. There are only two situations in which this does not apply: you will always need to have a payroll account linked to a mortgage loan agreement and register some direct debits.