Turning points can often be challenging when managing your personal finances. And no more so than in the important area of mortgage rates. With the European Central Bank (ECB) having announced no change in its base rates at Thursday’s March meeting, there is a bit of a phoney war going on about when it will actually move. But inflation is falling, interest rates have peaked and, at some stage this year, they are going to start falling. The tone of the comments by ECB president Christine Lagarde on Thursday – saying the governing council was “more confident” about inflation coming back to target, albeit not ready to move yet – will give hope to borrowers.
What should first-time buyers – or those moving house – do? As ever, there is no simple answer. But the first advice for borrowers is to try to see through the noise and the speculation of when exactly interest rates will fall and focus on what we do know, or at least what now looks likely.
1. The long game: All year the debate has been raging: will the ECB reduce interest rates in March, or April, or in June? To those in the financial markets the exact date may matter. But for those taking out mortgage loans this is a long game. Economist Simon Barry points out that more bullish market expectations at the start of the year that ECB interest rates might fall by 1.5 points or more have been pulled back as the ECB warns about concerns over inflation in the services sector and wage trends.
But the key thing is that inflation in the euro zone has fallen quickly, with the February reading estimated at 2.6 per cent, and there is little doubt that interest rates are, indeed, going to fall this year. April or June have always looked the most likely dates for the reductions to start and right now, given the warnings from some ECB board members, Barry says June looks more likely. This will probably be the start of a gradual downward march in rates through the rest of this year and into 2025. The cuts are likely to be in steps of a quarter of a percentage point – so a quarter-point cut in June would now be a reasonable bet for a place to start. Weak economic data could at some stage lead to half-point cuts.
2. The rest of 2024 and into 2025: There has been a bit of a tug of war between the markets and the ECB over expectations for the year. As of now, market interest rates point to a cut of a bit more than 0.75 of a point by the end of the year. The chief executives of AIB and Bank of Ireland both speculated recently that the cut this year could be a bit larger at 1.25 percentage points, bringing the ECB’s deposit rate, now 4 per cent, down to 2.75 per cent.
Mortgages in future will cost less than they do now, but more than they did in the years between the financial crash and the pandemic
Interest rates are likely to fall further next year, but the full extent of the decline is up for debate. However, Barry points out the ECB’s current interest rate settings represent “an extremely restrictive policy stance”. This means that even if they are cut from where they are now, they will still be acting to bring down inflation, until they reach much lower levels. With the heat coming out of inflation and the euro zone’s economic growth performance continuing to look weak, the case for maintaining such a restrictive stance is coming under pressure, Barry says. So if the ECB’s concerns on services and wage inflation ease, “there is plenty of room to take rates down from such high levels, and to commence the journey back towards a more neutral stance”.
Economists debate what interest rate would be neutral – neither stimulating nor holding back the economy. The ECB deposit rate, now 4 per cent, might fall to, perhaps, 2 per cent in time. But it will not return anywhere close to the minus 0.5 per cent level it was at before the increases started in summer 2022, barring some massive new economic downturn. Mortgages in future will cost less than they do now, but more than they did in the years between the financial crash and the pandemic.
3. The dilemma for borrowers: Irish borrowers have got used to fixing their mortgage rates in recent years. Attractive three- and five-year offers – many around 2.5-2.75 per cent – were available until interest rates started to go on the increase. With rates already at rock-bottom levels, these deals carried little risk for borrowers. And while bank margins were squeezed in the era of lower interest rates, they had significant deposits from savers to help fund these loans – and were paying little or no interest on these.
Now, however, the outlook has changed. ECB interest rates have peaked and are on the way down. This fall may be a bit more delayed than many borrowers had hoped for, but it is still on the cards. So the key risk is locking in at an interest rate that is too high for too long.
The precise trend in fixed rates is hard to predict, even when ECB interest rates do start to fall. Mortgage broker Michael Dowling points out that while ECB rates have increased by 4.5 percentage points, the banks have increased their fixed rates by between 1.75 per cent and 2 per cent. So as ECB rates fall, bank fixed-rate offers will fall more slowly. But, at some stage, fall they will.
Broker John Fahy of Pangea Mortgages feels there might be a cut of about 0.5 points in rates on offer to borrowers as the year goes on. The best fixed rates in the market at the moment are green rates from lenders such as AIB, Haven and EBS at 3.65-3.75 per cent for four to five years, but Fahy does not see offers going below 3 per cent. (In some cases low rates are also on offer for those with loan-to-value ratings (LTV) of below 60 per cent, which might help some mover purchasers carrying forward some equity from their previous home.)
These lower green mortgage rates should be available for many borrowers buying new homes with high BER (energy) ratings. They look reasonable in the context of where fixed rates might be over the next few years, though even these offers are likely to ease down a bit in the months ahead.
However, for those who do not qualify for green rates and are on normal LTV levels of 80 per cent or more, the fixed rates on offer are generally more than 4.5 per cent and a number of the big lenders are offering fixed three- and five-year rates of about 4.75 per cent, with some offers even exceeding 5 per cent.
In the context of a downward move in interest rates – and of lower rates of about 4 per cent already on offer from some smaller lenders such as Avant – these look to be high rates to lock in at.
There is no one ‘right’ answer in the current market. And there are already signs that borrower behaviour is changing
Broker Michael Dowling advises that customers in this position opt for a variable rate in the short term, planning to switch to a fixed rate later this year or early next year. He points out that there is no cost in switching from a variable to a fixed rate. Variable rates depend on the bank and the loan-to-value ratio but are generally about 4 per cent at the moment. There are also some reasonably-priced one-year fixed offers on the market as an alternative option to going variable. As ever, the array of rates on offer depending on circumstances, the preferences of individual buyers and the different terms and conditions attached to various loans means professional advice is advised.
There is no one “right” answer in the current market. And there are already signs that borrower behaviour is changing. Barry points out that in the final quarter of 2022, 89 per cent of new mortgage loans were for terms of three years or more. In the last quarter of 2023 this had fallen to 72 per cent, with a significant rise in those going to one-year fixed products.
Buyers can hope that competition in the market – and perhaps some political pressure on the big banks – will help the downward trend in offers. Fahy says that nonbank lenders such as Finance Ireland may re-emerge as players, increasing competition. Already smaller players such as Avant, owned by Spain’s Bank Inter, are active in competing for market share via rates at the lower end of the market.
4. The outlook: In broad terms, we have moved from a market where new rates were in the 2-3 per cent range to one where they are in the 4-5 per cent band. Moving into 2025 we might expect a fall back to the middle – offers of 3-4 per cent, depending on circumstances.
As well as new buyers, this has implications for those on trackers and also about 70,000 borrowers rolling off fixed rates this year. For those who have stuck with their trackers, they have taken a significant hit but are in line for some relief, albeit that it will be gradual in emerging. Those rolling off fixed rates, generally of well below 3 per cent, are facing a hike no matter what.
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As with new buyers, they should be careful not to lock in for too long a period at too high a rate in a market where rates in general should start to ease in the second half of the year.
