Financial Dictionary - Benchmark interest rate
Benchmark interest rate
The mortgage benchmark interest rate (or reference rate) is the official rate applied to variable rate mortgages. Remember that, with this type of loan, the monthly instalment will be determined by market fluctuations and, as a consequence, by these interest rates. If this interest rate rises, your instalments will go up when the bank revises your mortgage. And if it goes down, the opposite would happen.
For this reason, this benchmark is very important, as it will ultimately determine what you will be paying on your mortgage for many years to come. It may be a factor in deciding which type of loan may be of most interest to you: whether the fixed rate (which, remember, has a fixed interest rate for the whole life of the mortgage), or the variable rate (which depends on the cited benchmark interest rate, in addition to the spread, which is the fixed profit margin of each bank, and is determined by it).
These interest rates are defined in Banco de España Circular 5/2012, and are published every month. They are regulated as a practice of transparency, and with the aim of always protecting the customer. When you sign a variable rate mortgage, the bank will have to inform you about the rate it will apply, and include all the necessary information so that you can find out how it will calculate the interest it will charge you.
The Euribor and other benchmarks
The Euribor, or European Interbank Offered Ratio, is a rate obtained by averaging the interest rates at which different banks and institutions in the European Union lend to each other. This means that every time your bank lends you money (and to so many millions of customers in our country), it foregoes that amount, and must refinance itself to continue operating, by borrowing from other banks.
The Euribor is the interest rate that is most widely used as a benchmark for variable rate mortgages, and is therefore the one applied by your bank to obtain financing, adding the spread.
However, in addition to the Euribor, there are other rates, such as the Mibor (Madrid interbank offered rate); IRPH, which is hardly used, as it is somewhat controversial; and the IRS (Interest Rate Swap).
Issues to take into account when choosing a mortgage
When it comes to taking out a mortgage, it is very important to compare the available options. Let's not forget that it will be a responsibility for many years to come, so it is worth thinking carefully before taking the plunge. In conducting this analysis, the NIR and APR are key.
The NIR is the nominal interest rate. It tells you the percentage that the bank will charge you each year for lending you money. You must add the various fees that the mortgage has to this NIR.
The APR (annual percentage rate) is the way in which the loan fees would affect you.