European mortgage rates are rising in a move that will cost those with variables and trackers dearly. Here’s what it means for you.
Q: What happens?
A: The Governing Council of the European Central Bank (ECB) is scheduled to meet today. What is certain is that the 25 council members will raise interest rates for the second time this year. The only question is how big the increase is this time. The ECB surprised many with a 0.5 percentage point hike at its last meeting in July, the first hike in 11 years. Most economists expect an increase of 0.75 percentage points this time. But the ECB could opt for another 0.5pp hike to avoid a deep recession. Eurozone inflation is currently 9.1 percent while the euro is now worth less than the dollar.
Q: What is the cost for tracker rate customers?
A: A jumbo rate hike of 0.75 percentage point will be costly. This means that a family with a tracker rate of €200,000 over 25 years would face an additional €72 in monthly repayments. Over a year that makes €864 extra. Combined with last July’s surge, that means a €1,400 increase in annual repayments, which is one hell of a blow amid the worst cost-of-living crisis in a long time. If interest rates rise by 0.5 percentage points, this means an additional monthly repayment of €47. Seen over a year, this is €560 in higher payments. Add this to the increase in July and the additional annual cost is €1,100.
Q: And the variable and fixed rate ones?
A: Existing fixed-rate mortgage holders have recently been spared by the big banks. That’s unlikely this time. If there’s a 0.75 percentage point increase, that means adjustable rate customers can get a €200,000 25-year mortgage, with AIB, Bank of Ireland and Permanent TSB expecting an additional €78 in monthly repayments have to. Over a year, this is an additional €930 in mortgage costs.
Variable rates charged by non-bank lenders have risen recently. ICS Mortgages will increase its variable interest rates by 1.25 percentage points from October. Avant Money’s floating rate has increased to 2.45 percent for loan-to-value ratios up to 70 percent and 2.7 percent for loan-to-value ratios over 70 percent.
Finance Ireland has also raised interest rates on its fixed income products in recent months.
Q: What happens to fixed interest rates?
A: Future fixed interest rates are likely to rise in line with rising ECB rates. The fixed rates offered by Avant Money and Finance Ireland have already gone up.
Q: I am about to get a mortgage. Do I have to pay more than the approved interest rate?
A: Generally, if you are in the process of buying a home or changing providers, you have a permit with a rate specified in this letter. Unfortunately, you may not receive the interest rate stated on a mortgage approval letter. If interest rates rise in the meantime, you will receive a higher interest rate since you are receiving the interest rate at the time the mortgage is drawn down.
Q: What can people do in the face of rapidly rising interest rates?
A: Fixed rate mortgages remain at that rate until the end of their term. So if you’ve locked in 3 percent for three years, you’ll pay that rate for three years. At the end of the fixed period, be prepared to see that the fixed interest rates have moved up along with the floating interest rates in the meantime.
Mortgageholders with adjustable or fixed rates under two years must act now or be hit by huge increases in repayments, the latest research says Irish Independent Doddl.ie Mortgage Switching Index has found.
Martina Hennessy, chief executive of Doddl.ie, said a family with a five-year 3 per cent fixed rate should review their options two years before it expires and consider whether it would make sense to end their fixed rate early and fix yourself again now.
Since the lowest five-year fixed rate is currently 2.5 percent, the best five-year rate at the end of the specified period will likely be 3.5 percent.
You would end up paying an extra €130 per month to lock in for a new five-year plan. Over a year this would cost an additional €1,500 in repayments. This is based on a €250,000 mortgage with a term of 25 years and a loan to value of 80%.
Q: Why is the ECB raising lending rates?
A: The ECB hopes that by raising interest rates it can control inflation. The idea is to weaken demand by making borrowing more expensive. It is hoped that this will encourage households and businesses to hold back on spending, which in turn will ease price pressures. But others think it’s a terrible time to hike rates and will only push the EU, which is already grappling with a severe energy crisis, into recession.
Q: Should I give up my tracker and end my current fix?
A: “You would be crazy if you gave up your trackers” was the phrase invented by this journalist. This advice has served tracker mortgage holders well for the past 11 years. But things have changed. With trackers, banks can only increase the interest rate if the ECB changes its refinancing rate. And the interest rate you pay for a tracker is a set percentage above the ECB rate.
This is called the margin and it varies quite a bit. Typically the margin is around 1 piece, others have much higher margins. Rapidly rising interest rates are making some trackers expensive, reversing the situation we’ve had in recent years. But be warned: this advice only applies to those with expensive trackers. In other words, ONLY if your tracker is set to margin more than 1.5 percent over the ECB interest rate should you even consider giving up your tracker. Stick with the tracker if your margin is 0.5 percent or 1 percent or 1.25 percent.
High-margin trackers are getting expensive. If the ECB interest rate hit 2 percent, someone on the tracker with a 1.5 percent margin would be paying 3.5 percent interest. The reason it might be a good idea to ditch the tracker is that fixed prices are cheap for now. The key lies in good professional advice. Get a good real estate agent to check the situation.
Q: Will deposit rates go up?
A: The banks in this country are awash with cash, so they don’t have to increase the interest they pay savers to attract more. There are around $150 billion in deposits with banks and credit unions, more than enough to fund many mortgages. The banks will only increase the handouts they pay depositors if they have to, and right now they have no need for more funds.
https://www.independent.ie/news/how-will-the-latest-european-central-bank-interest-rate-hike-impact-on-you-41970463.html How will the European Central Bank’s recent rate hike affect you?