Euribor, an interbank lending rate that affects interest payments, is set to rise 1 percent this year, 2 percent in 2023 year and remain at a similar level at least until 2032. If you have taken out a mortgage in Lithuania, your monthly repayments are likely to rise. Here's what you need to know.
According to the Bank of Lithuania, the Euribor hike is expected in mid-summer. It will be felt by almost all residents of the country who have a mortgage – 98 percent of them have their interest rates recalculated every three, six, or 12 months, according to the Bank.
Those who have a loan with a 12-month Euribor rate are already paying more after the interest recalculation.
In mid-May, the 12-month Euribor was 0.31 percent. This means that Euribor has to be added to the bank's margin when the loan is recalculated. If a person has a loan of 100,000 euros for 30 years at a 2 percent interest rate, they have been paying 369 euros per month to the bank so far. With a 0.31 percent increase in Euribor, the monthly payment has increased by around 16 euros and will now stand at 385 euros.
With markets expecting the six-month Euribor to reach around 1 percent as early as December and 2 percent by the end of next year, LRT has calculated the amount that monthly repayments may change.
If a person has a 100,000-euro loan for 30 years at 2 percent interest, the monthly payment to the bank is currently around 370 euros. If Euribor rises to 1 percent at the end of the year, the monthly payment will increase to 420 euros. If Euribor rises to 2 percent, the monthly repayment will go up to 478 euros at the end of 2023.
For those with a 150,000-euro loan for 30 years at 2 percent interest, the monthly payment will increase from 555 to 632 euros if Euribor rises to 1 percent. If it rises to 2 percent, the monthly repayment will be 716 euros.
For those borrowing less – 50,000 euros for 30 years at 2 percent interest – the monthly payment will increase from 184 to 210 euros when Euribor rises to 1 percent and 238 euros when it rises to 2 percent.
The markets predict that Euribor will be around 2 percent for the next 10 years until 2032.
However, countries outside the euro area have already raised their interest rates by more than 2 percentage points. In the Czech Republic and Poland, for example, the base rate is above 5 percent. If the European Central Bank would follow suit – which is unlikely – the monthly payment on a 30-year, 100,000-euro loan would almost double from 370 to 665 euros.
According to the Bank of Lithuania, one of the ways to hedge against possible interest rate fluctuations in the future is to opt for a fixed, rather than a floating, interest rate.
However, even if the fixed interest rate remains unchanged, you are likely to pay more than with a floating rate.
“There is a price to pay for this hedge – normally, the fixed rate offered by banks is higher than the floating rate at the time, and the longer the fixed rate, the higher the difference can be,” Milda Stankuvienė, chief economist at the Bank of Lithuania's Macro-Prudential Policy Division, told LRT.lt.
In March, the average interest rate on a 5–10 year mortgage loan was 6.03 percent, while Euribor is only expected to be around 2 percent for the next 10 years.
Moreover, banks operating in Lithuania do not offer a fixed interest rate for more than 10 years.
“Choosing a home loan with long-term variable interest rates – fixed for a limited period, rather than for the entire term of the contract – reduces the risk of interest rate increases for a limited time,” said Stankuvienė.
“For the remainder of the loan period, the lender can offer a much higher interest rate than the one before,” she added.
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