12-month Euribor and other Euribor rates

The Euribor rates (Euro Interbank Offered Rates) are reference rates applied in the money markets in the eurozone. They are determined based on the interest at which large eurozone banks can get financing in the money market in euros without collateral.

Despite being based on the European market, few European countries use them as home loan reference rates as frequently as Finland.

“Eurozone countries have different characteristics in many ways. In Finland, variable rates have historically been popular, but in Germany, for example, borrowers favour fixed rates,” says Chief Analyst Jan von Gerich from Nordea.

Finns have a long history of favouring short and variable rates. The typical reference rate used in home loans is the 12-month Euribor although with rising interest rates, customers have begun to show interest in the 6-month and 3-month Euribor rates as well.

Reference rates are publicly quoted interest rates, and the values of Euribor rates can be checked on the Bank of Finland’s website.Opens new window

Variable rates change based on the movements in the interest rate markets, meaning that they rise when interest rates rise and fall when interest rates fall. With a variable rate, you get to benefit from favourable changes in interest rates, as the interest on your loan will decrease when the value of the reference rate falls. 

“The risk you need to accept with variable rates is that interest rates may rise, and if that happens, your interest will rise, too, when the interest period changes. Then again, if your loan has a fixed rate, it won’t rise with the market. You have been pretty safe from rising interest rates if you have fixed your loan interest for a long period,” says Jan von Gerich.

“You should consider carefully the choice between a variable Euribor rate and a fixed rate that will stay the same for a long period. This choice will make more difference that the length of the Euribor rate,” continues Jan von Gerich.

Currently, the Euribor rates are high, but borrowers may benefit from a variable-rate loan later when interest rates start to fall. On the other hand, the fixed rate available for loans may currently be lower than the current Euribor rates. 

“When you take out a home loan, a variable rate is generally lower than a rate fixed for a long period, so many consider it logical to choose the lower rate. Historically speaking, a short variable rate has been slightly cheaper on average than a fixed rate,” says Jan von Gerich.

12-month Euribor helps you plan your finances

Euribor rates are quoted for periods of varying length and provide alternatives for borrowers who see the risks related to rising interest rates differently. Short rates are quicker to react to changes in the interest rate level than the 12-month Euribor, which provides a bit more stability.

“In historical comparison, we can observe that shorter reference rates may end a certain period of time well above the level of their longer counterparts at the beginning of the period. So if your reference rate changes every three months, for example, the effect on your loan servicing costs may be significant,” says Jussi Pajala.

Despite being a variable rate, the 12-month Euribor provides some of the same benefits as a fixed rate, as it offers protection against rising interest rates for a while. 

The benefit that home loan customers get by choosing the 12-month Euribor is that they will know the amount of their monthly payments (with both principal and interest included) for 12 months ahead, which will help them plan their finances. 

The 12-month Euribor is also the reference rate for student loans.

The benefits of the shorter Euribor rates are typically related to the slightly lower rate they offer initially and to their quicker reactions to market movements when the general interest rate level starts to fall.

“At the time you take out the loan, the 3-month Euribor is often – but not always – lower than the 12-month Euribor. On the other hand, if interest rates start to fall, you will benefit quicker,” says Jan von Gerich.

But one thing applies to all reference rates: it’s impossible to say beforehand whether you will benefit from your rate choice or not. Short reference rates may be lower than the 12-month rate on the first interest review date, but as they change more frequently, the situation may quickly turn upside down.

In home loans the loan period is typically long, 23 years on average. The moment for changing the reference rate is short compared to the entire loan period. So when you’re assessing the interest expenses of your loan, it’s more essential to consider where interest rates will be in a few years rather than in a few weeks or months.

The uncertainty surrounding the future interest rate level and its fluctuation has clearly increased in the past few years. If you’re considering changing your reference rate, Jussi Pajala says the most important thing is to understand your need for making the change: “Why do you want to change the reference rate? Will you need stability and predictability with your loan payments or do you want to tap into the quick changes in the market?”

In some cases, changing the reference rate has been beneficial, but it always involves a risk of the interest rate market taking a turn that is negative for you. 

The choice of a reference rate is the choice each borrower makes based on the current circumstances. “If you want to change the reference rate later – in connection with purchasing a hedging product, for example – we can cater for that free of charge. But if you want to change the reference rate without doing anything else to your loan, we will charge a fee set in our tariff.”

Changing the reference rate may also affect the loan margin.