Euribor rates

In its June meeting, the European Central Bank (ECB) cut its policy rate by 25 basis points to 2% as expected. We expect no more rate cuts after this meeting. This means that the policy rate would remain at around 2% in the near future. 

The ECB’s policy rates influence market rates, such as the Euribor rates, which are familiar to people who have a home loan. 

Rate movements are dependent on the performance of the eurozone economy and on inflation, so our interest rate forecast involves uncertainty.

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-term 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 short-term reference rates as well.

“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-term variable rate has been slightly cheaper on average than a fixed rate,” says Jan von Gerich.

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

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.