Mortgages and Benchmark Rates
You may have recently heard about something called “Benchmark Rate Replacement Plans” and wondered what they are and how they might affect your variable-rate mortgage. Let’s make it easy.
When you take out a variable-rate mortgage, the interest you pay is usually linked to a market benchmark rate. In Italy, this is often the 3- or 6-month Euribor. Over time, the way benchmark rates are calculated can change significantly.
To address this possibility, a new law now requires that variable-rate mortgage agreements include a Replacement Plan. This plan explains clearly what will happen if the benchmark rate used in your contract is no longer available during the life of your mortgage.
Why this matters
This isn't just a technical detail. In 2012, it was revealed that some major international banks had manipulated LIBOR - a benchmark rate used globally for loans. Those banks submitted false data to influence the rate, gaining financial advantages and improving their image. As a result, LIBOR and similar rates were gradually phased out, with the last ones disappearing in 2024.
This caused huge uncertainty and led to millions of contracts being renegotiated - especially older ones that didn't include any replacement plans.
To avoid similar problems in the future, the European law now requires all variable-rate loans to include a Replacement Plan. The goal is to protect borrowers and ensure transparency and stability, even in extraordinary circumstances.
Starting in 2025, banks and financial institutions in Italy must publish and regularly update their Replacement Plans on their websites. They also need to inform customers about any updates at least once a year or as soon as possible.
If you already have a variable-rate mortgage, your bank will send you a notice proposing a change to your contract. This change adds a clause that allows the bank to switch to a different benchmark rate if the original one is discontinued or significantly changed. The new rate would be chosen based on the Replacement Plan published online.
If this ever happens, your bank must inform you within 30 days of the change. But for now, nothing will change: your mortgage terms, the benchmark rate, and the spread remain the same.
You also have the right to cancel your contract within two months of receiving the notice - without any fees and under the same conditions as before the change. This applies both when the clause is added and if the benchmark rate is actually replaced later on.
If banks don't follow these communication rules, the changes won't be valid.
Adding this clause to your contract is a safeguard. It helps you understand what could happen if the benchmark rate changes and gives you the chance to decide what to do.
In any case, remember that a major change or removal of your mortgage's benchmark rate is very rare. For the time being, there's no sign that Euribor - the rate used for most variable-rate mortgages in Italy and many other loans worldwide - is going to be discontinued or significantly changed.
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