Perhaps the best thing that can be said as we head into a new year is that things could be worse. They certainly aren’t a whole lot better than they were this time last year.
When the cost of 10 successive rate increases imposed by the European Central Bank (ECB) are added to higher energy prices and spiralling inflation up and down our supermarket aisles over the course of 2023, many consumers will be worse off by well in excess of €5,000 when compared with the heady days of 2019 – before Covid and the cost-of-living crisis reshaped our world.
While €5,000 is by any measure a lot of money many people have also seen wage increases that will have lessened the blow to some degree of higher prices across the board, but even so few people will feel better off today than they were three years ago.
The higher cost of borrowing has had the biggest impact on a large cohort of homeowners, with tens of thousands others set to feel the pain for the first time this year as they come off existing fixed-term deals.
In June 2022, the average Irish tracker mortgage holder was paying a rate of 1.15 per cent on their home loan and had been paying at that level for the guts of a decade. Today the average tracker holder is paying 5.9 per cent as the ECB pursues its inflation target of close to 2 per cent. For every €100,000 owed over a 15-year term tracker holders are around €230 per month poorer than they were before the record run of interest rate increases kicked in back in July 2022.
The pain felt by this cohort has been well documented but in excess of 50,000 mortgage holders are going to roll off short-term fixed rates in the next three years and unless there are some very unexpected developments in the corridors of power in Frankfurt they will see their rates almost double as soon as they do.
Martina Hennessy, of online brokers doddl.ie, notes that “a very standard three or five-year fixed-rate was 2.5 per cent up to mid-2022: however a five-year fixed-rate from Ireland’s largest mortgage lender currently stands at 4.85 per cent.”
Taking an outstanding mortgage balance of €250,000 with a remaining term of 30 years, a borrower rolling off a low fixed rate will see repayments rise by €331 per month, she warns.
She points out that the hike in monthly repayment costs likely to be experienced by those holding home loans other than ECB trackers in 2024 is “more severe than the average tracker mortgage holder due to the larger balances outstanding on mortgages issued post the withdrawal of tracker rates from the market in 2008″.
Even if the ECB reduces rates at some point in 2024, as expected, she notes that it will “not automatically mean the benefit of this decrease will be passed on to non-tracker and new mortgage customers”.
She says while the main lenders have thus far buffered some of their funding costs by way of deposits they hold with the Central Bank which are earning 4 per cent, increasing pressure from deposit holders for a higher return on their savings could squeeze banks and result in further mortgage rate increases.
Ms Hennessy suggests we have “entered into a new norm where the average mortgage rate is likely to start with a 4 per cent rate for the short to medium term”.
The year just gone saw a drop of over 80 per cent in mortgage-switching activity, she says, with a “common misconception” suggesting that in a higher interest rate environment it does not make sense to switch. “This is not the case. In fact with mortgage interest rates almost doubling in such a short period of time it is more important than ever for mortgage holders to take control over what is, for many, their largest financial commitment.”
The gap between the highest and lowest rate on the market “is the largest it has been in a decade”, she notes, “and as such the savings that can be made have never been greater”.
The lowest rate on offer starts at 3.65 per cent but rates across lenders in Ireland have breached 7 per cent. Taking the average home mortgage drawn down in the third quarter of 2023 of €300,631, “the difference between the highest and lowest rate could result in a saving of up to €7,000 per annum on this mortgage”.
Mark Coan of moneysherpa.ie also advocates switching, and is similarly downbeat about what 2024 has in store for Irish borrowers.
“The current ECB rate of 4.5 per cent has only been in place since this September so the average rate in 2023 was 3.83 per cent,” he says. “The current forecast from the ECB survey of professional forecasters is that the average rate in 2024 will be 4.34 per cent, so half a percentage point higher across the year. If these forecasts are right the average tracker household will be forking out over €500 more in 2024 than in 2023.”
And in what he says is a “double whammy” unlike last year there are currently no plans for tax relief for 2024 tracker repayments “so the average tracker customer will be €1,000 worse off in 2024 than in 2023″.
Coan is equally gloomy on inflation, noting that even if the rate of inflation comes down the “price increases we have seen are now ‘baked in’; prices will not be coming back down. In fact some of the increases in mortgage costs – in particular for those on trackers, variable and short-term fixed rates – haven’t yet fully rolled through, so 2024 looks set to be even harder on people’s pockets than 2023.”
While few mortgage holders will escape the attentions of the ECB, Daragh Cassidy of bonkers.ie says the worst hit cohort are those “whose loans were sold to so-called vulture funds. Some have seen their rates go as high 9 per cent and many of these so-called mortgage prisoners will be struggling badly.”
With general agreement that the ECB has come to the end of the current cycle of raising rates, he says the big question now is when it might start to cut rates and by how much. “The markets seem convinced that the ECB will have to start cutting rates as soon as March or April due to falling inflation and a flagging euro zone economy. However I think it’ll be a bit later than this.”
He notes that the main Irish banks have passed on less than half of the ECB rate hikes so far other than to tracker customers, although he points out that rates were very high here to begin with. “But it does mean that it is unlikely we will see the main banks respond to ECB rate cuts immediately. And if the ECB only cuts rates by 0.25 or 0.5 percentage points next year the banks may not reduce their rates at all.”
Assuming we do not experience another economic shock along the lines of Brexit, Covid or the war in Ukraine and its associated energy crisis, Mr Cassidy says: “I think the ECB will start cutting rates in June or July and its main rate will end the year around 0.75 percentage points lower – so at 3.75 per cent compared to 4.50 per cent today. I do think the markets have gotten ahead of themselves. They’re predicting rates falling as soon as March potentially and ending the year at around 3.25 per cent or lower. I think that’s too optimistic.”
And while gas and electricity prices have fallen in recent months, he notes they are still around double “normal levels”.
If wholesale prices remain close to where they currently are or ease a bit more, he would “expect another price decrease of around 10 per cent to 15 per cent in the latter half of next year”. This means by the end of 2024 we might see energy prices around 30 per cent to 35 per cent below where they were at the height of the energy crisis. However this would still leave prices around 50 per cent above where they were in early 2020, before Covid and then the war in Ukraine wreaked havoc with energy prices. “Prices may never return to these levels unfortunately,” he says.
Figures from Kantar Worldpanel point to a dramatic easing of inflation in grocery prices in the second half of 2023, but prices are still around 20 per cent higher than they were two years ago. And while inflation will ease, we are unlikely to see prices fall in the year ahead.
Mr Cassidy also points out that streaming services like Netflix and Disney+ have also seen big price jumps, tolls have gone up, as have broadband and TV services.
“All told the average household is around €3,500 a year worse off. And that’s before you even take into account changes to mortgage rates. It has to be remembered that Government supports have taken the sting out of a lot of this. But most households’ standard of living will have taken a fall.”
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