Euro zone interest rates  remain at low levels

by Mary Mangan

Economic news during August was very mixed but a positive note was sounded when Eurozone inflation slowed in the month, pointing to steady interest rates well into 2011.

Eurostat reported that inflation in the 16-nation currency area fell to 1.6 per cent year-on-year in August from 1.7 per cent in July, in line with economists’ expectations and comfortably below the European Central Bank’s target of just under two per cent.

The favourable inflation outlook gives the ECB the scope to leave rates at their very low level for the time being and it is not expected to see the first rate hike before the end of 2011.

Low interest rates are of great importance for the property market in Portugal. The cost of borrowing from Portuguese banks is mainly based on the three-month Euribor rate, which in turn is underpinned by the prevailing ECB base rate.

The three-month Euribor bank-to-bank euro lending rate has been at historically low levels for more than 12 months and is still below one per cent.

Euribor rates are fixed daily by the Banking Federation of the European Union (FBE) shortly after 10.00 GMT. They are in essence the European version of the UK Libor rates i.e the rates that banks lend to each other at, they ultimately determine how much the cost of financing will be for the likes of you and me.

At the time of writing, the three-month Euribor rate is trading at 0.89 per cent. The chart below illustrates the level of the three-month Euribor rate of the past 12 months from August 2009 to August 2010.

Depending on factors such as the loan amount and the ‘loan to value’ ratio, the bank will thereafter allocate a spread of between 0.50 per cent to two per cent on top of the Euribor rate for the life of the mortgage.

To give you some idea what this means to the borrower, there are a few examples below of the potential cost of a Portuguese mortgage on an interest only basis, based on the current interest rates and with a bank spread of one per cent.

Our experience would suggest that borrowers who are looking for lower loan to value amounts will benefit from the best rates available from the bank. 

In order to place yourself in the best possible position to conclude a successful property purchase, it is important to take all of the advice available at an early stage in the purchase process.

A good mortgage broker will want to meet you early in the process so that you can work together and build an understanding of both your requirements and what mortgage product and value might be available for you based on your own individual circumstances.

Then you can approach the property search process with confidence in knowing the options available to you which in turn will help your negotiation position.

If you are thinking about applying for a new mortgage or you are interested in information about funds transfer or property taxes it is vitally important to always check the qualifications of your broker in Portugal to ensure that you receive the highest level of professional assistance and care that is possible.

A good broker will be able to assist you with all aspects of the financing process and guide you towards the options at your disposal depending on your particular circumstances.  They should also work with you from inception to conclusion and manage the communication with all relevant parties throughout the process.

For more information on Portuguese financing options, currency transfers or property taxes please contact [email protected] or telephone +351 289 355 964.

Mary Mangan is the Managing Director of Winkworth Real Estate Portugal. The company has six offices across the Algarve and a presence on the Silver Coast.