Euribor rates have been rising for three months on all maturities. But the situation is expected to worsen in the coming months. This is because the European Central Bank (ECB) is expected to start interest rate hike benchmark, as a measure to combat the current rise in inflation in the euro area. So how might the growth of Euribor affect your level of effort?
Euribor rates go up, now what?
If you have an Euribor-related mortgage, the impact you will feel will be on the monthly payment you pay for it. This means that your current effort rate calculated by the bank to approve your loan will also increase. As a rule, banks approve mortgages for those whose rate is not higher than 30% – the limit so that the family budget is not too tight.
However, it all depends on whether you have other loans, other installments, or credit cards. But let’s move on to explaining what effort level and what it represents in your mortgage so you understand if it will bother you if it goes up.
What are my efforts with the increase in Euribor?
What, after all, is the norm of effort? This is the ratio between your family’s net monthly income and your expenses. That is, the income received should be enough to cover expenses so that the family budget is not cramped.
For example, assuming your net income is €1,500 and you pay off a loan of €400, you can calculate your effort level as follows:
Effort Level = (400/1500) x 100 = 26.7%
Thus, in this case, the rate is equivalent to 26.7%, which is below the maximum limit of 30% set by the Bank of Portugal for mortgage loans.
But let’s take another example: if you get €2,000 net, you have a €600 installment installment on your mortgage, your effort rate goes up to 30%. If you have other charges in addition to this loan, such as a €100 car loan payment and €80 monthly credit card debt, the effort rate would be equivalent to 39%.
However, if your loan payment increases, your efforts will also increase.
In this sense, if your allowance increases by 50 euros, and incomes do not grow, it may be worth making adjustments to the family budget.
While this is not a significant increase at this point, you should be careful not to make new loans or expose yourself to new charges. Instead, focus on reducing non-essential services in order to increase the financial deficit of the family budget.
But if in the long run Euribor rates continue to rise up to the point that it could impact your productivity in the form of a €200 increase, your effort level is already up to 49%. Here you must take measures that involve cutting costs so as not to put the budget at risk and be able to cover all the necessary expenses.
In this case, small cuts may not be enough to achieve the liquidity you need. And you may need to consider solutions such as renegotiating your loan terms, transferring your loan to another bank, or pooling loans to reduce your effort.
