Good and Bad News for Mortgage Borrowers: Payments Decrease in June, But Rate Cuts Will Be Slower

Mortgage Payments Decline, but Interest Rate Cuts May Be More Gradual

As the European Central Bank's (ECB) expectations of interest rate cuts continue to drive down Euribor rates and mortgage payments, there is both good and bad news for those with home loans. While mortgage payments are set to decrease in June, the reduction in interest rates may be more gradual than previously anticipated.

The Euribor rates, which are the benchmark for variable-rate mortgages in Portugal, have continued to decline to new lows in recent months. The three-month Euribor rate fell to 3.785% today, while the six-month rate dropped to 3.745% and the 12-month rate decreased to 3.711%. This marks the lowest levels for the three-month and six-month Euribor rates since September 2023 and June 2023, respectively.

Furthermore, the average Euribor rates in May also decreased across the three time frames, with the three-month rate falling 0.073 percentage points to 3.813%, the six-month rate dropping 0.052 percentage points to 3.787%, and the 12-month rate declining 0.021 percentage points to 3.681%.

The six-month Euribor rate, which is the most commonly used index for variable-rate mortgages in Portugal, has been the focus of attention. After peaking at 4.143% in October 2023, the highest level since November 2008, the six-month Euribor has now fallen to 3.745%, the lowest since June 2023.

"The expectations of the market point to a decrease in the reference interest rates of the European Central Bank (ECB) at the next monetary policy meeting, on June 6. This decrease, if it materializes, should lead to a moderate decline in Euribor rates and thus lower mortgage payments."

However, the anticipated interest rate cuts by the ECB may not be as swift as some had hoped. Analysts are forecasting that Euribor rates will likely reach around 3% by the end of the year, suggesting a more gradual decline than previously anticipated.

At its last monetary policy meeting on April 11, the ECB maintained its reference interest rates at the highest level since 2001 for the fifth consecutive time, after having implemented 10 increases since July 21, 2022. This has contributed to the significant rise in Euribor rates, which began to increase more notably from February 4, 2022, after the ECB acknowledged the possibility of raising its key interest rates due to the increase in inflation in the euro area.

The Euribor rates hit all-time lows in late 2021, with the three-month rate reaching -0.605% in December 2021, the six-month rate reaching -0.554% in December 2021, and the 12-month rate reaching -0.518% in December 2021. However, the upward trend has been reinforced since the start of the Russian invasion of Ukraine in February 2022.

Despite the expected slowdown in the pace of interest rate cuts, the decline in Euribor rates should still result in a decrease in mortgage payments for borrowers in the coming months. The impact will depend on the specific terms of each mortgage, but homeowners can expect some relief on their monthly payments.

Portuguese Economy Grew 1.5% in the First Quarter

In a separate development, the Portuguese economy grew by 1.5% in the first quarter of 2023, marking the fifth consecutive quarter of positive growth. The National Statistics Institute (INE) highlighted that, although the gain in terms of trade was less pronounced than in the previous three quarters, it remained positive on a year-on-year basis.

This sustained economic growth, coupled with the easing of Euribor rates, suggests a cautiously optimistic outlook for the Portuguese economy and mortgage borrowers. While the pace of interest rate cuts may be slower than some had hoped, the overall trend remains favorable, providing some relief for homeowners with variable-rate mortgages.

A graph showing the trend of Euribor rates over time
A graph showing the decline in Euribor rates in recent months.

As the ECB continues to navigate the delicate balance between controlling inflation and supporting economic growth, mortgage borrowers in Portugal will be closely watching the developments in the coming months. While the good news is that mortgage payments are set to decrease, the bad news is that the reduction in interest rates may be more gradual than some had anticipated.


A chart showing the Portuguese economy's growth in the first quarter

Nonetheless, the overall trends remain positive, with the Portuguese economy continuing to demonstrate resilience and the Euribor rates trending downward. Mortgage borrowers can take some comfort in the fact that their monthly payments are set to decrease, even if the pace of the interest rate cuts may not be as rapid as some had hoped.