The financial impact of seven successive interest rate increases from the European Central Bank is hard to overstate and many people will be thousands of euro poorer because of decisions taken in the bank’s Frankfurt boardroom.
On Thursday it decided to raise interest rates by a modest sounding 0.25 of a percentage point as part of a relentless effort to reign in inflation and bring it back to a magic 2 per cent. With inflation still over three times what the ECB desires, the warning from the bank’s president Christine Lagarde that more rate increases are coming was unsurprising. It means more pain is coming too.
Just under a year ago tracker mortgage holders paid rates of between 0.5 and 1.5 per cent while variable rates went from 2.25 to 4.75 per cent. Now the situation has been reversed, with the tracker mortgage holders set to pay from 4.25 to more than 5 per cent as variable rates remain largely untouched.
According to David Kerr of bonkers.ie a person with a tracker of €200,000, a margin of 1 per cent and a 20-year repayment period will see monthly repayments climb by €37 to €1292 from next month. That is €373 more each month than before rate rises began. That works out at close to €4,500 a year, a net figure which means many people will have to earn €9,000 just to plug the financial hole created by the ECB.
It is not just tracker mortgage holders who are going to suffer – although they have felt the pain first. Other mortgage holders and would-be mortgage holders will not be immune to the sting of rate rises. As much as €12 billion worth of mortgages will be coming off low fixed rates over the next three years and into a much higher rate environment.
First-time buyers and switchers, meanwhile, have seen the most attractive deals disappearing. The best possible fixed mortgage available this time last year was Bank of Ireland’s Four Year High Value Green Mortgage at 1.9 per cent. “The lowest on the market today is still this mortgage product, but the rate is 3.4 per cent,” Mr Kerr said. “A rate of 3.4 per cent is also offered by Avant Money on their three-year fixed product.”
According to financial adviser Mark Coan of MoneySherpa.ie many tracker holders can still save money by switching. He said one reason many tracker mortgage holders were slow to switch despite clear signals ECB rates were climbing was “because of the mantra people have heard for such a long time about trackers being like gold dust. That was right at one time but even though the climate changed and even though the market conditions changed an awful lot of people remembered being given that advice.”
He pointed out that a tracker customer who switched to a 10-year fixed rate mortgage with Avant Money in June 2022 would make savings – based on today’s rates – of around €19,000 over the lifetime of the loan.
He warned that while value can still be found for people switching to fixed rates, much of the value will disappear in the weeks ahead.
One area where there has not been much activity is in the variable rate space. Of the major banks only AIB has increased its variable rates with an increase of 0.35 per cent. The bank’s fixed rates have climbed by around 1.5 per cent over the same period.
Mr Coan suggested that little or no movement on this front may be in the best interests of the banks rather than their customers.
“It may be that the banks feel that if they did start passing on the rate hikes to variable rate customers it would put the spotlight on them and they would have to ask answer questions as to why they have not passed on the increases to their customers who have money on deposit.
“Irish banks might consider themselves better off if they take all of the money they have on deposit with Irish customers and put it into bank accounts in Europe and get 3.5 per cent rather than passing on the interest rate hikes to variable rate mortgage holders which would bring a lot of attention on them from a political perspective,” Mr Coan suggested.
Trevor Grant from the Association of Irish Mortgage Advisors noted that the latest hike could be “the straw that breaks the camel’s back for many borrowers”.
He said that while those on tracker mortgages “have taken the brunt of the increases in ECB rates, others are increasingly being drawn into the firing line”. He said the “only saving grace” was that it was 0.25 of a percentage point which is half of what it has been in recent months. “Hopefully any further rate rises to follow this year will be even less again, though ideally today’s rate rise would be the end of the increases.”
