Drop in Euribor Rates Suspends Mortgage Payment Moratorium

The mortgage payment fixation measure ends in December for most families who joined this "moratorium" about a year ago, providing immediate relief on house payments.

Significant Decline in Euribor Rates Benefits Families

The sharp decline in Euribor rates in recent months is having an unexpected (but positive) effect on thousands of families who opted for the temporary mortgage payment fixation measure, promoted by the then Minister of Finance, Fernando Medina, at the end of 2023.

Impact on the Moratorium

Many of the 8,636 families who between November 2023 and March 2024 chose to join this “moratorium” to reduce the burden of their house payments on the family budget will see the measure suspended as early as December, due to the current monetary market conditions.

This situation arises because the 6 and 12-month Euribor rates are currently trading below the “protected interest rate” associated with this measure, which was set at 70% of the 6-month Euribor at the time of joining. In practice, this means that the protected rate of the mortgage moratorium was established between 2.72% and 2.88%, depending on the month families joined the measure.

How the New Moratorium Will Work

According to the Decree-Law regulating the rules of this measure, the application of payment fixation for two years is immediately suspended when the index rate of the mortgage contract falls below the protected rate. This clause, which initially aimed to protect families from significant interest rate increases, is now being triggered due to the rapid decline in Euribor rates.

“According to the regime outlined in Article 7(2) of Decree-Law No. 91/2023, of October 11, combined with Article 3(1) of the same decree, the application of the measure is immediately suspended when the index rate of the credit contract falls below what results from applying 70% of the 6-month Euribor plus the contractually agreed spread,” explains the Bank of Portugal to ECO.

Families who have the measure suspended will effectively benefit from lower payments than they would have with fixation. Should Euribor rates rise again, they will automatically be “protected” by the payment fixation measure once more.

Different Impacts by Euribor Type

Not all families who joined the measure will be affected simultaneously. For instance, no mortgage indexed to the 3-month Euribor will be subject to suspension in December, as the average 3-month Euribor rate in November (which will apply in December for mortgage contracts) is expected to remain above 3%, thus higher than the moratorium's protected rates.

For contracts indexed to the 6-month Euribor, the average rate expected in December is 2.8%, meaning that contracts joined in the last two months of 2023 will be removed from the support measure and revert to the original terms contracted at the time of purchasing the house. However, families who joined in January, February, and March remain protected, as the protected rates during these months were 2.75%, 2.72%, and 2.73%, respectively.

Effect of Suspended Moratorium and Interest Rate Bonuses

December will mark the first month of suspension of the support measure for families with mortgages indexed to the 6-month Euribor, as the rate falls below the protected rates established in the first two months of the measure.

For mortgages indexed to the 12-month Euribor, this situation was already resolved in November, when the average 12-month Euribor rate was 2.69%, suspending all contracts that had joined the payment fixation measure. In December, the expected average 12-month Euribor rate is 2.51%, confirming the suspension of the measure.

Automatic Resumption of the Measure

The payment fixation measure may automatically resume if the credit contract's index rate exceeds the initially protected rate before two years have passed since the start of joining the “moratorium”. This means that families do not permanently lose the benefit but enter a sort of “waiting mode” while market rates remain low.

Interest Rate Bonuses in the More Housing Program

Associated with the decline in Euribor rates, the interest rate bonus measure on mortgages, part of the More Housing program promoted by the previous government, is expected to decrease for most contracts.

“The bonus applies to the difference between the contract index rate and the 3% threshold, being 100% of the calculated amount when the borrower has an effort rate equal to or exceeding 50% and 75% of the calculated amount when the effort rate is equal to or exceeds 35% but below 50%, regardless of the IRS bracket, up to the limit of the sixth bracket,” states the Decree-Law regulating this measure.

As both the 6-month and 12-month Euribor rates are already below this level, and the 3-month Euribor is approaching quickly, this support measure is also being reduced.

Since its implementation, this support has benefited over 20,000 families, falling far short of the 200,000 eligible contracts.

Impacts on Families

The suspension of these two measures will have varied impacts on affected families. On one hand, it means that mortgage payments will decrease, reflecting the current lower market interest rates, providing immediate relief to many Portuguese households.

On the other hand, suspending the measure reintroduces an element of uncertainty in the financial management of families. The stability offered by payment fixation, which allowed for more predictable financial planning, is temporarily removed. Families are exposed again to market fluctuations, which can generate anxiety, especially considering the economic volatility of recent years.

Expert Opinion

Although the suspension of the measure may initially seem like bad news, it is important to contextualise that it occurs in a scenario of more favourable interest rates for consumers. Families who have the measure suspended will benefit from lower payments than they would have with fixation. Should Euribor rates rise again, they will automatically be protected by the payment fixation measure once more.

However, Natália Nunes, coordinator of the financial protection office at DECO, states that “payments remain very high compared to what they were in 2022”, also noting that “there are still families experiencing financial strain”.

Conclusion

The payment fixation measure was always designed as a temporary solution for a period of rising interest rates, primarily aiming to provide a “safe haven” for families during a time of economic uncertainty. Its suspension due to lower rates is, to some extent, a positive sign for the economy and particularly for household budgets.