Reform of the new Euribor is approaching in baby steps. And even though the timeframe for the new calculation method to come into effect seems to have stretched out (the new parameter was supposed to arrive by the end of the year, but it will be back in 2021), it is still of interest to try to predict what might happen, and what the impacts might be on the positions of variable-rate borrowers.
In short, what is about to change for adjustable-rate mortgages with the switch from the old to the new Euribor?
The current Euribor
Going in order, the current Euribor, or Euro Interbank Offered Rate, is an interbank bidding benchmark in euros that is agreed upon based on the behavior of a panel of 20 European Union lenders who voluntarily indicate the average interest rate charged on their interbank financial transactions (i.e., those involving two banking institutions).
Thus calculated, Euribor is a parameter used to be able to estimate the cost of money in forward transactions in the interbank market, with maturities between 1 week and 12 months. From the above, it follows that the entire banking system takes Euribor as the benchmark for its cost of money, using it as the basis for the mechanism for calculating the "finished rates" applied to its customers.
For example, a bank customer who has applied for a 20-year variable-rate home purchase loan with monthly installments will experience the contractual application of a rate that will be composed of the 1-month Euribor, to which the lending institution will add a spread negotiated with its counterparty.
The new Euribor
The above situation will remain crystallized until December 31, 2021. Instead, from the next day, namely January 1, 2022, the new Euribor, favored by benchmark regulation reform, should come into effect. But what changes?
In short, this is a change in the benchmark that, as such, will also impact Euribor and, therefore, bank customers applying for variable-rate mortgages.
In order to make the benchmark for indexed rates more fair and transparent, the European legislator would like to anchor the new Euribor on multiple parameters (and no longer just on the deductions of the panel of voluntarily interested banks), and on actual transactions. Given that it is possible that the new calculation mechanism could also boast other market information sources, it is not incorrect to speak of a hybrid Euribor, which will distort the current calculation approach.
What changes for mortgages
Legitimate, then, to start wondering what might change for mortgages. Although there is rather little information available to us at the moment, most financial analysts estimate that in reality the changes will be limited, and not likely to have a major impact on the cost of transactions for European borrowers.
Some forward-looking observations made, for example, estimate the differential between the old and new Euribor to be less than 5 basis points. That is, an almost imperceptible change on monthly installments. But will this really be the case?
