The move by the European Central Bank (ECB) to increase its main lending rates by 0.25 per cent from early next month will cost tens of thousands of tracker mortgage holders an average of €300 over the next 12 months. The cumulative annual impact of nine increases since last July exceeds €5,000 for many homeowners.
It is not just those whose repayments are directly linked to ECB rates who will bear the brunt of the bank’s aggressive moves to fight inflation over the last 12 months. Fixed rate mortgage holders coming to the end of agreed terms and those on variable loans are also facing what has been described as a “rate cliff” in the months ahead.
The bank has raised its main lending rate to 4.25 per cent, compared with a zero rate just over a year ago. Each quarter of a point increase adds around €25 to monthly repayments on a tracker mortgage with a 1 per cent margin over the ECB rate and €200,000 outstanding.
“Although the impact of ECB rate rises has been mainly limited to tracker mortgage holders and those with vulture funds so far, the net is now widening as mainstream lenders start to also increase their variable and fixed rates,” said Mark Coan of financial adviser moneysherpa.ie.
He pointed to a recent financial stability note from the Central Bank of Ireland which assumed that lenders would pass on 60 per cent of ECB increases to variable rate customers.
“Based on this, variable rates would rise from an average 3.64 per cent currently to over 6 per cent. Which would add a chunky €171 a month to the average mortgage repayment. This scenario is quite conservative,” he said.
He noted that in the UK “pass through rates have been more like 100 per cent” and “if that was to happen here we would see variable rates of up to 7.9 per cent”.
Martina Hennessy of digital mortgage platform doddl.ie, said more rate increases were possible before the end of the year and highlighted how the nine imposed to date had added as much as €540 in monthly interest to an average tracker mortgage of €250,000 with a 20-year term.
She suggested that tracker holders would be “keenly watching” for indications of rate falls in the early part of next year but said a “return to the days of a 0 per cent ECB rate in the lifetime of their mortgages” is not on the cards.
Rachel McGovern of Brokers Ireland said the hike would “pile a lot more pressure on borrowers” and she noted that there were in the region of 315,000 tracker mortgage and variable rate mortgage holders, and 400,000 plus mortgage borrowers on fixed rates, of which over six in 10 are fixed for less than three years.
Many of the latter group will be exiting these fixed rates in the near future, she said, and will be “coming out into a challenging higher interest rate market at a level they would never have anticipated”.
Trevor Grant of the Association of Irish Mortgage Advisors echoed her concerns and said that while tracker mortgage holders have “taken the brunt of the increases” others are “increasingly being drawn into the firing line”.
“More than 60,000 homeowners will come off their low-cost fixed rates this year, while another 70,000 will do so next year,” he said.
“The mortgage bills of these 130,000 homeowners will shoot up unless they act now to shield themselves from the mortgage shock just around the corner.”
