Housing loan interest rates nudge upwards after long decline

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The historically steep drop in the Euribor (Euro Interbank Offered Rate) interest rate, which is the reference rate that housing loans are linked to, appears to have come to a halt. The market rates have been showing a slight upward trend already for a week.
      Compared with the slide in the interest rates that has been continuing since last autumn, the current rise has been slight but distinctly greater than any seen before during the long downward period.
      ”The markets are fairly confident that the time of the European Central Bank’s (ECB) reductions in interest rates is likely to be over”, says Jukka Ruotinen, analyst at Pohjola Bank, explaining why the interest rates have turned upwards. At present the ECB’s reference rate is just 1%.
     
The rise in the interest rates is also attributable to a decrease in the banks’ liquidity. In the difficult period, the banks have kept cash reserves for a rainy day, lending it out as short-term overnight loans. Such cash surplus has driven down the interest rates of short-term inter-bank lending.
      ”The surplus liquidity has largely vanished, when the situation has improved and the economic outlook has become brighter. This has led to a hike in the interest rates of overnight loans”, says Jan von Gerich, analyst at Nordea Bank.
     
Both Ruotinen and von Gerich expect that in spite of a slight increase, the interest rates will remain low for a long time to come. Because of the poor economic situation, the ECB cannot raise the interest rates for the time being.
      ”I would expect interest rates to remain at the same level until at least into 2010 - probably well into 2010”, notes Ruotinen.
      Von Gerich regards it as likely that the short-term rates have already bottomed out.
      However, pressures for lower long-term rates of interest are still continuing, following the ECB’s promise to extend the duration of the financial operations offered to banks to one year. The first of such operations is to be seen late next month.
      Moreover, the risk premiums of loans continue to be declining.
     
When the interest rates eventually do start turning upwards, typically the long-term rates will be the first to rise.
      However, among Finns with housing loans those who have linked their loans to the 12-month Euribor are in the best position, as the long-term rates of interest are adjusted at longer intervals than the short-term ones.
      As a consequence, the debtor will have an opportunity to enjoy lower interest rates for up to 12 months after the interest rates have begun to head upwards.
     
While the interest rates were declining, it was advantageous for debtors to change to the 3-month Euribor, which many of them actually did.
      The changeover boom is now done and dusted, says Jussi Mekkonen, director of the household customers' unit for Nordea.
      However, those who take out new loans are still more willing to choose the short-term reference rate more often than usual, as it is currently more favourable than the long-term rate.
      ”I myself cannot regard it as sensible, as the short-term reference rates are likely to go up very rapidly. The rates of interest are bound to increase sooner or later. Such low interest rates cannot possibly continue year after year”, Mekkonen notes.
     
For at least one month, housing loans have already become more expensive, as the margins the banks add to the reference rate have gone up more rapidly than the Euribor rates have come down.
      According to Mekkonen, the number of housing loans sold in the first months of the year has dropped by about 25 per cent compared with the corresponding period last year.
     
Euribor rates are market rates used as the reference rates linked to housing loans.
      The Euribor is based on the averaged interest rates at which banks offer to lend funds to other banks in the euro wholesale money market.
      The Euribors follow and anticipate the ECB bank rate, at which the central bank offers to lend funds to banks in the interbank market.


Previously in HS International Edition:
  12-month Euribor rate goes through 5.00% (23.5.2008)

Links:
  Euribor (Wikipedia)

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