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.

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 on your loan 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 are now pretty safe from rising interest rates if you have fixed your loan interest for a long period,” says Jan von Gerich.

If, however, you choose a fixed rate, expecting the interest rates to rise, but they won’t rise, you will probably end up paying more for the fixed-rate loan than you would have paid for a variable-rate loan. 

Currently, the Euribor rates are high, but borrowers may benefit from a variable-rate loan later when interest rates start to fall.

“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. On average, a short variable rate is cheaper than a fixed rate,” says Jan von Gerich.

Euribor rates are quoted for periods of varying length and provide alternatives for borrowers who have different attitudes towards the risks related to rising interest rates. Shorter rates are quicker to react to changes in the interest rate level, whereas the longer 12-month Euribor provides a bit more stability.

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. With this stability, it’s easier for them to plan their finances.

“Shorter reference rates may well end a certain period of time well above the level of their longer counterparts at the beginning of the period. If your reference rate changes every three months, for example, the effect on your loan servicing costs may be significant,” says Jussi Pajala, CEO of Nordea Mortgage Bank.

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

6-month and 3-month Euribor rates are quicker to react to market movements

“At the time you take out the loan, the 3-month Euribor is usually lower than the 12-month Euribor, but during a period of rising interest rates, it’s also quicker to react to changes in the interest rate level. 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.

“We will negotiate individually with each customer and tailor the loan to suit their particular needs. If you want to change the reference rate later – in connection with purchasing a hedging product, for example – we can cater for that. 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,” Jussi Pajala advises.