EURIBOR Reference Index explained

EURIBOR stands for the Euro Inter Bank Offered Rate. This is quite simply the interest rate at which European banks can borrow money (from each other) over a set period, for example over 3 months. There are several other EURIBOR indices for other time frames - including 6 month and 12 month EURIBOR.

EURIBOR has a panel of 49 reference banks from in zone countries as well as international banks. Bank of Tokyo-Mitsubishi, Chase, Citibank, JP Morgan, Bank of America and UBS have been selected to represent international banks.

So, the best way of thinking of this is that EURIBOR is effectively the "wholesale" cost of borrowing money, as opposed to the "retail" cost of borrowing the money.

The significance of this interest rate index is quite simply that some lenders' schemes are linked to a particular EURIBOR index. It is common for Spanish variable rate mortgage schemes to be reviewed quarterly, in line most commonly with the 3 month EURIBOR rate, but in some case with the 12 month EURIBOR rate.

On such schemes, in addition to the relevant EURIBOR rate there will be the lender's own set interest rate margin over and above EURIBOR (which might be 1.5% over 3 month EURIBOR, as an example).

The lenders margin over EURIBOR represents the "gross profit" to the lender of lending the money, which it may have borrowed at the EURIBOR rate itself, in some cases.

In the UK, the equivalent of EURIBOR is known as "LIBOR" (London Inter Bank Offered Rate) - which is exactly the same kind of concept, although the current rates of EURIBOR and LIBOR are not directly related.

In the UK this type of interest rate setting has also become increasingly popular and similar schemes are referred to as "Base Rate Tracker" mortgages. Many clients prefer this type of arrangement, as you are not dependent on your lenders' discretion about the timing of mortgage interest rate changes. The lender can only charge the Index rate plus their set margin (the lenders' margin cannot vary during the life of the mortgage). Lenders cannot keep their mortgage rate artificially high for existing customers, if general money market rates fall. Many key UK lenders have been extremely quick to put their mortgage rates up in the past but then very slow to bring them down when money markets rates fall - using their discretion on traditional variable interest rate timing to maximise profits (at their captive customers' expense whilst offering brand new customers much cheaper mortgage rates). This cannot be done with an Index Tracking mortgage scheme, such as a scheme linked to EURIBOR / LIBOR or to other similar money market indices.

History of past values for the 12 month EURIBOR since it 1999