Will mortgage interest rates rise in Portugal?

Interest rates have been negative in recent years, enabling consumers in Portugal to access credit at lower cost. However, the recent rise in inflation in the European zone has rekindled fears of an inflexion in interest rates, which have started on an upward trajectory in recent months and have become more pronounced with the outbreak of military conflict in Eastern Europe. 

Five years later, Euribor reached positive indices on April 12. Economists had been predicting this for a long time. All that remained was to find out when.

Will mortgage interest rates rise in Portugal?

Who decides whether to raise or lower the interest rate?

At each monthly meeting of the European Central Bank, it may be decided to maintain or change the key interest rate, which the ECB charges banks for lending them money. Any revision of this rate influences all credit contracts between banking institutions, which define Euribor. 

The last revision took place in September 2019, when the deposit rate fell to -0.5 %. The key rate, meanwhile, was parked at 0 % in March 2016 and has remained unchanged since. However, market dynamics and expectations regarding the evolution of economic indicators also influence rates Euribor set by European banks as they seek to anticipate the next steps in monetary policy. Ultimately, it is these rates that directly influence variable-rate credit contracts.

Why has inflation risen?

Several factors have contributed to this scenario. One of them is the rising price of oil and energy in general. The military conflict in Ukraine was a major factor. On the other hand, the expansionary monetary policies of recent years have led to an excess of liquidity on the market, but this was without counting on the appearance of a pandemic in 2020 and its immense impact on global production and distribution chains. Inflation has, in fact, risen. Average inflation in the eurozone reached 7.5 % in March. In Portugal, the inflation rate was 5.3 %.

Is it inevitable to correct rising inflation by raising interest rates?

This is the classic response to inflation scenarios, but a very significant variation could have damaging consequences in the current economic climate. National and family indebtedness is at very high levels, and the economic recovery of companies is still very weak, notably because the pandemic has led to serious constraints on the activities of many institutions over the past two years. 

On the other hand, the rise in inflation, which has led to a generalized increase in prices, is not accompanied by wage increases, thus reducing consumer purchasing power. A correction in the interest rate is admissible, but it should be very slight and in small, gradual doses. This movement is already anticipated on the financial markets, influencing the Euribor.

Will Euribor rise?

Interest rates are strengthening their upward trajectory begun in recent months. We accept that an increase in ECB benchmark rates could occur in the coming months. Currently, 12-month Euribor has already reached positive values, while 6-month Euribor is around -0.3%, and we consider a rise of 0.5 or 1 percentage point until the end of the year plausible.

Will mortgage payments increase?

Yes, it seems inevitable that this will happen in the coming months. Here are some scenarios for consumers with mortgage contracts with a spread of 1% and 6-month Euribor.

100,000 euros for 30 years

• Average current payment with Euribor -0.3%: 308.05 euros
• Average payment with Euribor at 0%: 321.64 euros
• Average repayment with Euribor 1%: 369.62 euros

150,000 $ 30-year term

• Current average Euribor payment -0.3%: €462.07.
• Average payment with Euribor at 0%: €482.46.
• Average payment with Euribor at 1%: €554.43.

200,000 30-year term

• Current average Euribor payment -0.3%: €616.09.
• Average payment with Euribor at 0%: €643.28.
• Average repayment with Euribor 1%: 739.24 euros