Some mortgage borrowers will benefit immediately from latest interest rate cut by the European Central Bank ( ECB), notably those on tracker mortgages. This group suffered most as official interest rates went up and is now benefiting as they fall. Elsewhere, reductions have been slower to flow through.
In many cases, too slow.
Banks say, with some justification, that variable interest rates and new fixed rate offers did not rise in tandem with ECB rates during the big increase which started in summer 2021. And there have indeed been some reductions in non-tracker rates as ECB rates have fallen.
But many interest rates remain clearly out of line – in particular some variable rates and some of the prices quoted for fixed rate products, which can go as high as 5 per cent. Banks are moving to cut rates to savers generally and there is no case to delay cuts to borrowers as well.
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Results from AIB, Bank of Ireland and Permanent TSB this week all showed strong profitability. Were the market more competitive, they would be under more pressure to cut mortgage rates. As it is, some smaller lenders are playing a welcome role, but the three big players still control the bulk of the market.
Mortgage borrowers who had their loans transferred to the ownership of funds following the financial crash often also remain disadvantaged. While there have been some reductions announced by the firms which now manage these loans – the biggest of which are Pepper and Mars Capital – in some cases the interest rate charged remains at 6 per cent or higher.
These borrowers were promised when their loans were sold as part of the deleveraging process of the banking groups that they would not be at a disadvantage. As it turns out, they are. Many have already had their loans restructured and so cannot move to another lender. The Central Bank needs to maintain relentless pressure on these companies to give lenders a better deal,
The outlook for interest rates remains uncertain. Further reductions are likely, though may take time to come through. The euro zone economy remains weak, though extra spending on defence and investment could spur growth. Germany’s plans to loosen its fiscal rules have already led to a jump in longer term interest rates on financial markets. A trade war with the US could cut growth, but could also push up inflation.
The ECB will have to wait and see how things play out. It hedged its bets yesterday and market analysts, who had previously forecast two more interest rate cuts this year, are now not so sure. But at least one more reduction is likely in the months ahead and so banks have no reason not to pass the benefits of what has happened so far on to borrowers. Their results this week show they can well afford to do so.
