Mortgage relief as Euribor rates fall  .jpg

Mortgage relief as Euribor rates fall  


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IN AN unprecedented step aimed at kick-starting the economy, getting banks to lend to each other and to breathe life into the flagging housing market, the European Central Bank has slashed interest rates by 50 base points to 3.25 per cent.

The decision, announced by Central Bank president Jean-Claude Trichet, follows hard on the heels of the Bank of England’s historic decision to cut interest rates by 1.5 per cent – the highest drop since 1981.

But commercial banks, including those in Portugal, are taking advantage of the climate of uncertainty by borrowing money from the European Central Bank and, instead of putting it to work by lending it out on medium and long term, are keeping it safely stashed away or making very short term deposits and loans.

“It’s unlikely that the average man in the street will feel the benefits for a while yet in Portugal, since the various banks have to get together first and decide by how much to drop their own lending rates between each other – the Libor,” said one banking analyst at Banco Espírito Santo, adding that even so, the full extent of the cuts “would probably not be passed on to customers while market volatility and uncertainty persisted.”

However, the decision to cut interest rates for existing home owners is good news as the monthly payment plus interest rates on the average 150,000 euro loan over 25 years plummet from a 5.88 per cent high (891.63 euros per month) in May 2007 to 3.25 per cent on November 6 (837.71 euros).

And the monthly payments on a 100,000 euro loan plus interest over 25 years could be reduced by as much as 200 euros a month or 2,000 euros a year as of next year if the six-monthly Euribor rate determined by banks falls in line with reductions made by the European Central Bank.

Even so, the lowering of interest rates is a far cry from the cheap lending seen back in January 2006 at 3.3 per cent when the average monthly payment plus interest rates stood at record lows of 656.93 Euros.

If this happens, families living in Portugal with mortgages, many of them over-indebted, will feel relief in terms of their monthly budget.

The decision to cut interest rates was welcomed by the President of the Association of Portuguese Real Estate Agencies, Agents and Professionals (Associação dos Profissionais e Empresas de Mediação Imobiliária de Portugal), José Eduardo Macedo, as “excellent news.”

The rate at which banks lend to each other (Libor) has shown signs of dropping after the ECB’s decision to slash interest rates.

The decision to cut interest rates was taken after European Commission economists confirmed that the Eurozone is on the brink of recession with economic growth falling to 0.2 per cent in the second quarter.

A Commission statement has warned that in 2009 “the EU economy is expected to grind to a standstill,” marking the Eurozone’s first recession since the currency’s launch in 1999.

Manufacturing in the Eurozone fell in October to its lowest level since 1997 while the Commission predicts further falls of 0.1 per cent in the third and fourth quarters of 2008 and overall growth of just 0.1 per cent next year and 0.9 per cent in 2010.

All countries within the region saw new orders and manufacturing output fall, with Germany, France, Italy, Spain, Portugal, Austria and Ireland experiencing serious falls.

For the first time, countries once firmly opposed to joining the Euro currency such as Sweden, Norway, Denmark and Iceland, are now seriously toying with the idea of accepting the currency.

Most Portuguese economists now accept that Portugal will be unlikely to avoid entering into a recession as her major trading partners succumb to shrinking orders and falling exports.

According to an IMF report on Portugal published in October, the country’s overall growth rate by the end of this year would be only 0.6 per cent, and 0.1 per cent in 2009, based on the fact that 80 per cent of Portugal’s exports go to Eurozone countries, particularly the United Kingdom, France and Germany, which are all suffering the worst effects of the recession.

Not only that, the situation in Portugal’s other major trading partner Spain is none too rosy as the number of unemployed there reaches a 12-year high of 11.3 per cent according to Spain’s Labour Ministry, the highest in Europe.

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