Discount rate: variable interest payments
The ECB discount rate is the reference index for many variable rate mortgages, whose interests follow the trend of this international rate. The discount rate is one of the main tools available to the European Central Bank (ECB) to influence the economy and the performance of the financial markets: it in fact measures the interest rate that the banks pay to borrow money from the ECB for finance its operations, such as loans and mortgages. As a result, the more expensive it is for banks to borrow money.
The more these lenders will demand high remuneration from their customers
The ECB discount rate has replaced, in the countries that have adopted the euro as Italy, what in the past was known as the official discount rate (TUS) , which likewise measured the financing costs of the banks. The ECB can use the rate in two ways: by raising the rate, a so-called “credit crunch” is caused because the costs for all operators increase (from the banks that borrow from the ECB, to the customers, who see themselves raising the rate on the own operations and reduce them); on the contrary, reducing the value of the rate means favoring the circulation of money, because the banks will finance themselves more easily and will be able to ask customers for more accessible rates. In recent years, the ECB rate has been at historic lows.
What are the practical consequences of these financial dynamics for consumers?
Those who suffer the most from the discount rate fluctuations are the holders of a variable rate mortgage. We remember in fact a mortgage can have a fixed or variable interest rate: in the first case, the interests always remain the same on all the repayment installments, while with a variable rate they change over time, following the trend of some international reference indices . Among these, the main ones are the ECB discount rate and the Euribor, a measure of the cost that the banks bear when they borrow from other credit institutions.
Finally, it must be remembered that the interest on a variable rate mortgage does not precisely coincide with the value of the ECB discount rate in force at that time (the Central Bank reviews the rates every 3 months, here you can find the historical trend): the bank in fact it will always impose the payment of a spread , equal to the difference between the rate paid by the customer and that paid by the bank. This difference constitutes the credit institution’s profit.