Tahminae Madani, Director of France Home Finance comments on :
Many of you will have read in the news that the ECB (European Central Bank) has dropped their base rate to 2.50%. What is confusing to many of our clients is how a drop in the ECB rate affects the EURIBOR and how the EURIBOR finally affects the rate paid for a consumer mortgage.
The EURIBOR is the European interbank lending rate. This is the rate at which banks lend money to each other. Why do banks that have our money on deposit need to lend money to each other? A simplified answer is that banks can only lend a fixed percent of their own money. They are required by law to keep enough cash reserves on hand to be able to meet client withdrawal demands at any given time. Therefore, to be able to provide more loans to clients, they borrow from other banks and pay the other banks interest on the loans. The EURIBOR is the market rate they charge each other. It is influenced by supply and demand. If lots of banks are willing to lend to others, it goes down. If few banks are willing to lend to others, it goes up.
Historically the EURIBOR has followed the ECB base rate movements. This year we have seen the EURIBOR spike much higher above the ECB rate due to fear of bank failures. Banks were not willing to lend money to other banks as they were not sure who was going out of business next. Government intervention such as guaranteeing bank deposits and dropping the base rate has greatly helped to restore this confidence however it is taking time. There is still a larger than “usual” gap between the EURIBOR and ECB rates.
Finally, the interest rate you, the consumer, pay on your French mortgage. This is usually a product of the sum of the EURIBOR plus bank margin. As the cost to obtain money for the lending banks has not gone down as fast as the ECB rate, you will see your rates dropping but not as quickly. It will take some time to work it all out and hopefully get back to a period of business as usual!
