Euribor 3-month mortgage rates

Q: WE HAVE a house in France and are considering a remortgage which is tied to the “Euribor three-month rate” - I have tried to get an opinion on where the rate is likely to go over the coming years but cannot. Can you help?

A: When looking to raise finance against your French property, you are right to assume that the mortgage will almost certainly be linked to the Euro Interbank Offered Rate (Euribor).

The Euribor is used as a reference rate for Euro-denominated forward rate agreements, in very much the same way as the Libor is commonly used for sterling facilities.

Credit agreements can be linked to one of a number of different Euribor variants, from the changeable one-week Euribor up to the more secure 12-month rate.

The majority of French mortgage products are linked to the three-month or 12-month rates.

To find out more about the Euribor, including the latest tables of rates with current and historical data, you can visit the official website at www.euribor.org

A quick glance at the historical data will tell you that the base rate has followed roughly the same course as the Bank of England index over the last 18 months or so.

As recently as October 2008 the Euribor three-month rate stood above 5%, but it has been heavily affected by the credit crunch and the subsequent global economic turmoil.

Base rates have been repeatedly cut in a bid to unfreeze the credit markets, to the point that the same rate now stands at 0.70%.

Of course, accurately predicting the fate of the Euribor over the coming months and years is virtually impossible, as it depends on so many factors.

However, many financial commentators do cautiously suggest that the European Central Bank will raise interest rates more quickly than the Bank of England.

An interesting insight into how the Euribor will fare in the coming year is provided by the International Mortgage Outlook 2010 (IMO 2010), produced by International Private Finance.

Seventy-five per cent of the French lenders who participated expect the Eurozone base rates to finish the year at between 2.25 and 2.5%.

Although this may seem like a bit of a hike, we must not forget that we are currently witnessing unusually low rates of interest.

Assuming margins are around 1.5% by the end of 2010, a European base rate of 2 - 2.5% would give variable mortgage rates of between 3.5 to 4%.

This would still be fairly low by historical standards.