New Euribor pushed back to 2022: what will change for variable rate mortgages?

Two more years until we adopt the new Euribor. The European Commission has decided that the change to the new system of indexing mortgages rates in Europe can be pushed back to 2021. What are the consequences for loans and mortgages in Italy?

Two more years to adopt the new Euribor

In a surprise move, the European Commission decided to allow two more years for the actual adoption of the new Euribor and Eonia mortgage rate indices. “The EU institutions agreed to grant providers of “critical benchmarks” – interest rates such as Euribor or EONIA – two extra years until 31 December 2021 to comply with the new Benchmark Regulation requirements,” reads the statement from the European Commission. “Given the crucial importance of third-country benchmarks for EU companies, the extra two years for benchmarks produced outside the EU was also introduced to provide additional time for work with non-EU regulators on how these benchmarks can be recognised as equivalent or otherwise endorsed for use in the EU”.

In other words, the representatives of the EU countries voted for the decision to allow more time to adjust for the panel participating in the compilation of "critical" indices for the definition of financing rates. This decision has also been extended to the less critical rates, which will give the panel more time to obtain EU authorisation to use the new indices with customers for the pricing of products such as home mortgages, credit cards and others. As a result, the adoption of the new Euribor and Eonia indices, which was expected by the end of 2019, will be extended to the end of 2021.

Variable rate mortgages, 109 thousand billion euro of contracts linked to Euribor

The reason for this decision was to avoid any difficulties in accessing the new parameters – designed to ensure greater transparency for customers given their more market-oriented construction – which could create difficulties for the financial markets and also for companies. A gradual transition could instead guarantee greater stability to the 22 thousand billion euro in derivative contracts linked to Eonia and the 109 thousand billion euro linked to Euribor throughout the EU.

Mortgage rates: what will happen with the new Euribor?

So, what are the consequences for mortgage rates? "We didn’t expect anything shocking to happen,” says Stefano Tempera, founder of Cercamutuo.com, “but all things considered, this is good news for people who have a variable rate mortgage, at least because today the Euribor is below zero and there should be no repercussions in the next period. In fact, the new parameters should have been more exposed to the markets and therefore more liable to fluctuations."

"The postponement of the reform of the Euribor certainly has a neutral impact,” adds Renato Landoni, President of Kìron Partner. “We will continue to index variable rate mortgages according to the current Euribor parameter, and so nothing will change from the current situation just because of a postponement of two years, unless there are further extensions in which case the banks and the financial bodies in charge will have more time to identify and evaluate which instruments to adopt in order to make the transition to the new calculation mechanism as smooth as possible for the customers that have already undersigned a financing to variable rate. In addition to the timing of application, it’s not very clear yet what the rules are for calculating the new Euribor parameter, nor the rules of engagement and entry into force of the mechanism on mortgage products already in circulation. Pending clarifications in this sense, it is therefore difficult to make an estimate today of what could be the impact on the monthly instalments of borrowers.”

Riccardo Bernardi, Chief Development Officer of 24MAX, says, "The changes to the Euribor would not have had a great impact on a market that continues to be extremely favourable for those who can buy a house with a mortgage. We are and will continue to be in 2019 in a situation where mortgage interest rates have touched the lowest values ever and property prices are at their lowest since 2004. A few hundredths or tenths of a percent would not have changed the situation. However, a postponement means more time for everyone to adjust to the new calculation parameters.”

"The new reference rates will certainly have consequences,” notes Ivano Cresto, mortgage manager of Facile.it, “both for those who have already taken out a mortgage that is based on the Euribor today, and for all savers who are thinking of applying for a new mortgage. What is really difficult, however, is to be able to establish how and to what extent. According to simulations by the European Money Markets Institute, if the hybrid model that is being perfected as a substitute for the Euribor were applied to today's reality, one would find oneself with a rate that differs from that applied today to a minimal extent: between 1 and 5 basis points. If you are not inclined to take on this risk, however, you can have recourse to a fixed rate mortgage that, with the current market situation, is still very advantageous.”