How will the rise in EURIBOR affect an apartment association's renovation loan?
After 8 years, it should be noted that an experiment called ‘EURIBOR negative interest rates’ has come to an end. This means that the average lending rate between European banks used by banks to issue loans is again positive. The direct effect of this is expected to be an increase in loan repayments, including renovation loans for apartment buildings.
The change in EURIBOR stems from the fact that its trends are driven by the European Central Bank's interest policy, which in turn is an instrument for keeping the European economy stable. EURIBOR therefore affects existing and future borrowers, including apartment associations, who wish to apply for a loan to renovate, modernise or make the residential building more sustainable. It is important to realise here that applying for a loan is always a responsible activity, which is why the risks and different drivers involved need to be thought through, and SEB Bank is ready to provide open advice on this.
Due to the changes in the interest rate environment, where the long-term EURIBOR (EU6) is positive and changes every six months, the associations planning to apply for a loan in the (near) future should also take into account possible future changes in the EURIBOR index when building up the repair fund. In simple terms, there are two possible solutions:
- The general meeting of the apartment association decides to build up a repair fund with a sufficient buffer or be prepared for a situation where every year or every few years the amount of the repair fund per 1 m2 has to be increased depending on the situation.
- The alternative is to fix the interest rate, which is generally carried out for a period of up to five years. This option should be seen in the light of the fact that the fixed interest rate applies on a stand-alone basis, which is somewhat higher for the current variable rate. With this option, be prepared for an increase in the repair fund fees on a situation-by-situation basis.
For example, assuming that an apartment association with a total apartment area of 5000 m2 were to apply for a loan of EUR 300,000 for renovation works with a schedule of 20 years, the loan expenses with positive interest rates for the owner of the 50 m2 apartment would be as follows:
- a) In the case of a floating 6-month EURIBOR (current market level of ca 0.7%), the monthly bill to be paid to the apartment association would be 2 euros higher.
- b) In the case of fixed EURIBOR for 5 years (current market level of ca 1.5%), the monthly bill to be paid to the apartment association would be 4 euros higher.
Despite the fact that the European interest environment has changed, SEB Pank is keen to remain a good partner in the new situation, helping to ensure that the entire loan application process is well thought out and that the different situations and risks are professionally understood, with the support of tailored advice and correct analysis.
SME-Large Corporates Client Executive at SEB