Does my effort rate increase with Euribor? – Money and Career

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Euribor rates have been rising for three months on all maturities. But a scenario is expected to worsen in the coming months. Indeed, the European Central Bank (ECB) should begin rising interest rates benchmark, as a measure to combat the current rise in inflation in the euro area. So, how can the rise in Euribor impact your rate of effort?

Euribor rates are rising, now what?

If you have a home loan associated with an Euribor rate, you will feel the impact on the monthly payment you pay. Which means that your current effort rate, which the bank calculated 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 get to the explanation of what the effort rate and what that represents on your home loan, so you know whether or not it’s worrying if it goes up.

How does my rate of effort change with the rise in the Euribor?

What, after all, is the rate of effort? It is the ratio of your net monthly household income to your expenses. That is, the income they receive must be sufficient to cover expenses so that the family budget is not tight.

For example, assuming you have a net income of $1,500 and are repaying a loan of $400, you can calculate your effort ratio as follows:

Stress ratio = (400/1,500) x 100 = 26.7%

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

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

However, if your monthly loan payment increases, your effort rate will also increase.

In this sense, if your allowance increases by 50 euros, and your income does not increase, it may be wise to adjust your family budget.

Although this is not, for the moment, a significant increase, you must be careful not to make new credits or expose yourself to new charges. But focus instead on cutting non-essential services, to increase the financial leeway of the family budget.

But if, in the longer term, the Euribor rates continue to climb at a point that could affect your performance since an increase of 200 euros, your rate of effort already reaches 49%. Here, you need to take steps that involve cutting costs so that you don’t jeopardize the budget and can cover all essential expenses.

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

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