There's a term that's often used in variable-rate mortgage contracts for property or business: 3-month Euribor. This financial index has a direct impact on your repayments. Its fluctuations can raise questions, especially when interest rates fluctuate sharply. Understanding how 3-month Euribor works is essential if you want to keep your budget under control and know your rights as a borrower.
This page demystifies this financial index. We'll look at what 3-month Euribor is, how it affects your repayments, what legal protection you have, and what you should check in your credit agreement.
What exactly is 3-month Euribor?
Euribor (Euro Interbank Offered Rate) is a reference interbank rate on the European money market. The 3-month Euribor is the average rate at which major banks in the eurozone lend to each other for a period of three months. It reflects the short-term cost of money between institutions in the banking sector.
It is set by the EMMI (European Money Markets Institute), an independent body based in Brussels. Each business day, the banks on the panel submit the rates at which they estimate they will be able to borrow over different periods. After eliminating extreme rates, an average is calculated and published. The main rates published include 1-month Euribor, 3-month Euribor and 6-month Euribor.
Historical data shows that the Euribor is not the key rate of the European Central Bank (ECB), but monetary policy decisions have a strong influence on its price. It reacts to liquidity conditions and the expectations of players in the financial sector.
This index is governed by European Regulation 2016/1011 (Benchmark Regulation). This regulation guarantees the reliability, transparency and integrity of the reference rates used in financial contracts, following past manipulations such as those of the LIBOR rate. Using Euribor in your loan contract therefore offers guarantees of methodology and monitoring by the European Union.
How does the 3-month Euribor affect your loan in practice?
In a variable-rate loan indexed to 3-month Euribor, the interest rate fluctuates during the repayment period. It is made up of two elements: the 3-month Euribor index and a fixed margin added by the bank. The formula is as follows Loan rate = 3-month Euribor + Margin.
It is the change in the 3-month Euribor that causes your rate to vary. Your contract specifies the frequency with which the rate will be reviewed in line with the value of Euribor on a given date. This review may be quarterly, half-yearly or annual, depending on the month euribor rate chosen as the reference.
A rise in Euribor means an increase in your rate at the next review, which means higher monthly repayments or a longer loan term. Conversely, a fall in the rate can reduce your repayments.
This mechanism mainly concerns home loans and certain business financing products. More rarely, it can be found in large consumer loans.
Choosing a variable rate involves a degree of uncertainty. While it may initially offer more favourable terms, it exposes the borrower to interest rate risk. Assessing your ability to cope with any increases is therefore crucial before signing.
Your rights as a borrower when faced with a variable rate indexed to Euribor
French law provides protection for individuals under the Consumer Code. These provisions aim to ensure a balanced contractual relationship with the lending institution.
The bank has an obligation to provide information. Before the loan is signed and in the loan offer, the lender must provide clear explanations of how the variable rate works. As stipulated in articles L313-1 et seq. of the Consumer Code for home loans, the offer must detail the indexation terms: exact reference of the index, margin applied, date and frequency of revisions.
The bank must also provide simulations illustrating the impact of changes in the rate on the repayments or the term. This will enable you to make an informed decision. The Annual Percentage Rate (APR) must take account of this variability or be accompanied by explanations of potential changes.
The content of the contract is regulated. An indexation clause based on the 3-month Euribor must be drafted clearly and unequivocally. If it is incomprehensible, imprecise or leaves the bank too much discretion, it could be considered unfair.
The article L212-1 of the Consumer Code defines an unfair term as one that creates a significant imbalance between the rights and obligations of the parties, to the detriment of the consumer. Case law has penalised indexation clauses that are ill-defined or lack transparency. For example, a clause that does not allow the borrower to check the calculation of the rate applied could be challenged.
The principle of good faith, enshrined in Article 1104 of the Civil Code also applies. It requires both parties to perform the contract faithfully, which includes ensuring that the bank correctly applies the revision terms provided for.
What should you check in your contract and what steps should you take?
When faced with a loan indexed to 3-month Euribor, reread your contract carefully, even years after it took effect on 1 January or another date.
Examine the interest rate clause. Check it out:
- The exact reference of the index: Does it say "3-month Euribor" or "Euribor rate"?
- The bank's margin: Is it clearly indicated and fixed?
- The date and frequency of revisions: When and how is the rate recalculated?
- The existence of a cap: Does your contract include a cap rate? This protection limits the potential increase, even if Euribor rises sharply. If there is no cap, the risk is theoretically unlimited.
Keeping track of the current Euribor rate (available on financial websites with graphs) will help you anticipate future revisions. In Germany as in France, when faced with a likely rise, adjust your savings to avoid payment difficulties.
There are a number of situations that justify a more active approach: doubts about the clarity of your indexation clause, insufficient information when you took out the contract, the bank applying the revision rules incorrectly, or financial difficulties caused by the latest rise in interest rates.
In such cases, legal advice may be appropriate. A lawyer specialising in banking or property law can examine your contract, check that the clauses are compliant, identify any breaches by your banking group, and discuss possible strategies.
These strategies range from asking the bank for clarification, to negotiating an adjustment (switching to a fixed rate, reducing the margin), or even taking legal action. A prior legal analysis will help you identify the issues at stake and adopt the approach best suited to your situation.
Need help with your Euribor-indexed loan?
Is your loan indexed to the 3-month Euribor and are you wondering about its implications or the clarity of your contract? Our company is at your disposal to examine the details of your situation and advise you on the appropriate steps to take. A point difference can represent several million euros on the total volume of a large loan. Contact us for an initial assessment.
Sources
- Consumer Code (in particular articles L. 212-1, L. 313-1 et seq., L. 314-1 et seq.)
- Civil Code (in particular article 1104)
- Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016
- Definition and publication of Euribor rates on the European Money Markets Institute website
- 6-month Euribor rate and other indicators on the Banque de France website
- History of overnight rates and swap rates on the European interbank market
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