Does my effort rate increase as the Euribor rises? – Money and Career

Euribor rates have been rising for three months on all maturities. But it is expected to be a scenario to worsen in the coming months. This is because the European Central Bank (ECB) is expected to start raising benchmark interest rates, in a measure to combat the current rise in inflation in the Eurozone. So how can the rise of Euribor impact your effort rate?

Euribor rates are rising, now what?

If you have a home loan associated with a Euribor rate, the impact you will feel is on the monthly installment you pay for it. Which means your current effort rate, which the bank calculated in order to approve your credit, will also increase. As a rule, banks approve a mortgage for those who do not have an effort rate above 30% – the limit so that the family budget is not too tight.

However, it all depends on whether you have other loans, other installments or credit cards. But let’s move on to the explanation of what the effort rate is and what it represents in your home loan, so that you understand whether or not it is worrying if it goes up.

How is my effort rate with the rise in Euribor?

What, after all, is the effort rate? It is the ratio between your household’s net monthly income and your expenses. That is, the income they receive should be enough to cover the expenses so that the family budget is not tight.

For example, assuming you have a net income of 1,500 euros and you pay a loan payment of 400 euros, you can calculate your effort rate as follows:

Effort rate = (400/1,500) x 100 = 26.7%

Therefore, in this case, the effort rate is equivalent to 26.7%, being below the maximum limit of 30% authorized by the Bank of Portugal for mortgage loans.

But let’s look at another example: if you receive 2,000 euros net, you have an installment of 600 euros of the mortgage loan installment, your effort rate rises to 30%. If, in addition to this loan, you have other charges, such as a car loan payment of 100 euros and a monthly credit card debt of 80 euros, the effort rate will be equivalent to 39%.

However, if your credit installment goes up, your effort rate will also increase.

In this sense, if your benefit increases by 50 euros, and your income does not grow, it may be advisable to make adjustments to your family budget.

Although it is not, for the time being, a significant increase, you should be careful not to make new credits or put yourself in new charges. But rather focus on cutting non-essential services, to increase the financial slack in the family budget.

But if, in the longer term, Euribor rates continue to rise to a point that could affect your installment, such as an increase of 200 euros, your effort rate already reaches 49%. Here, you must take measures that imply a reduction in costs so as not to put the budget at risk and to be able to cover all essential expenses.

In this case, small cuts may not be enough to achieve the liquidity you need. And you may have to think about solutions such as reviewing other conditions on your credit, transferring your credit to another bank or doing credit consolidation, to reduce your effort rate.