The Euro Interbank Offered Rate (Euribor) is something you must bear in mind when taking out a variable-rate mortgage, as it directly influences how much you'll have to pay back each month.
A mortgage is a type of loan banks extend to customers in order to help them buy property. The borrower commits to paying back the principal amount, plus interest, in monthly instalments over a specific term.
In variable-rate mortgages, instalment amounts can change because interest is pegged to a benchmark rate. In Europe, the most common benchmark is the Euribor, which is the price at which European banks lend money to each other. If it rises or falls, the amount you'll have to repay will change.
Variable-rate repayment also factors in a fixed rate known as the “spread”, plus the outstanding principal and the remaining term.
According to Banco de España (Spain’s central bank), if the Euribor is at 0.1%, monthly repayment on a 25-year, EUR 200,000 mortgage with a 1% spread will be EUR 762.83; if the Euribor rises to 0.5%, it will be EUR 799.87.
When is my variable-rate mortgage updated?
The bank can automatically adjust repayment on a variable-rate mortgage every six or twelve months, based on shifts in the benchmark and the terms of the loan agreement with the borrower.
Are variable-rate mortgages a good or bad idea? It depends. Mortgage brokers and private bankers consider a loan applicant’s finances, preferences and risk appetite, as well as market conditions.
You can calculate monthly repayments and fees with this simulator on Santander España’s website (in English).
Central banks and mortgages
In Europe, the Euribor, the rate at which banks lend to each other, is a central component of variable-rate mortgages: if it changes, so will the instalment amount that borrowers pay. Monetary policy, which are set by central banks (like the ECB) have a significant bearing on the Euribor.
If inflation is high, central banks may raise interest rates to curb demand and cause prices to fall. However, that will cause the Euribor and instalment rates to spike.
Outside Europe, major central banks include the Federal Reserve System (or the “Fed”) in the US, Banco de México (or "Banxico") in Mexico, and Banco Central do Brasil in Brazil.
Alternatives to variable-rate mortgages
A variable-rate mortgage isn't the only property loan out there. With a fixed-rate mortgage, borrowers pay the same instalment amount throughout the loan term, regardless of market volatility or any other factor that can affect the repayment rate.
Blended-rate mortgages combine fixed and variable rates. The borrower starts paying a fixed rate, which changes to a variable rate later on.