The rate cuts keep coming from the European Central Bank don’t they?
Don’t they just. We are in a downward spiral for sure and it is one that has been fuelled by low rates of inflation and fairly anaemic economic growth across the eurozone in recent months.
And it is good news, right?
Well, anaemic economic growth comes with its own challenges for sure but the cut is certainly good news for around 130,000 people who have tracker mortgages. It will also be welcomed by anyone in the market for fixed rate and variable rate mortgages in the months ahead.
Talk to me first about tracker mortgage holders?
The 0.25 per cent cut announced by the ECB equates to a €13 per month saving for every €100,000 owed on a tracker mortgage. That means that someone with an outstanding home loan of €250,000 is likely to be better off by around €33 per month from the end of this month.
But this latest cut comes on top of a few more, right?
The ECB began cutting rates in June as inflation across the euro zone eased. The June cut was 0.25 per cent with a similar rate cut rolled out in September alongside what the ECB referred to as a technical adjustment which amounted to a 0.35 per cent cut. Then in October and December rates were cut by 0.25 per cent and at the end of January a further 0.25 per cent cut was confirmed.
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What does all that mean for the bank’s interest rates?
It means that the ECB’s lending rate is now 2.65 per cent compared with 4.5 per cent this time last year.
That seems like a big difference, what does in mean in money terms?
As we said a few questions ago, a.25 per cent cut sees monthly repayments fall by €13 for every €100,000 left on a home loan. Someone who owes €300,000 will be paying a fairly hefty €305 a month less from the end of March than they were 12 months ago. Spread that over the cost a year and the savings come in at more than €3,600.
Great news for tracker holders, but what about the rest of us?
The new rate cut should see the rates of thousands of so-called mortgage prisoners whose loans were sold to vulture funds and who are paying variable rates as high as 7 per cent fall although by how much and when we can’t say.
And what about fixed rates and the variable rates offered by the mainstream lenders?
They have already fallen significantly since this time last year. Some fixed rates lower by up to 1.5 per cent. There are unlikely to be falls in the short term although competitive pressures might lead some banks to offer more attractive rates to new customers. Trevor Grant is the chairman of Irish Mortgage Advisors and he says that “in time the reductions do trickle down. The recent fixed rate mortgage cuts announced by a number of banks is evidence that this is already happening. Indeed, the average interest rate on new mortgages is already at its lowest rate in two years."
And what happens next?
That is the big money question. The ECB is likely to cut rates a few more times this year but the pace might slow. “After six cuts in a row, looking forward, the future path for interest rates now looks a bit less clear,” says Darragh Cassidy of Bonkers.ie. “I think the ECB might pause its rate cutting cycle in April. But we’re still almost guaranteed another one or two cuts before the end of the year, which could take the ECB’s main policy rate down to 2 per cent - half what it was as recently as last June.
Are there any downsides to this?
The ECB cut will not be welcome by Irish savers and is likely to see the deposit rates on the table stall or fall as the year progresses.
is there anything else I should know?
There is also a fear that lower rates will overheat the Irish economy. “Our economy is performing much better than the rest of the Eurozone, as Wednesday’s bumper tax receipts show, and arguably doesn’t need lower interest rates. At least not right now,” Cassidy says. So this could lead to an uptick in inflation. Cheaper borrowing costs are also likely to add further fuel to an already overheating property market, which is really the last thing that we need.”
