Hundreds of thousands will be affected when the AIB hikes interest rates on all types of mortgages

AIB is introducing rate hikes on all mortgage types, affecting hundreds of thousands of borrowers, for the first time since the European Central Bank (ECB) hike cycle began last July.

As a boost for savers, the bank is also raising the interest rates it pays on deposits.

The move comes just hours after the ECB announced its latest 0.5 percent rate hike today, bringing the total rate hike to 3 percent since last summer.

The Bank of Ireland and Permanent TSB are expected to follow in the coming weeks as Irish interest rates move towards more normalized levels, market sources say.

AIB said it would raise rates by an average of 0.5 percent on all tracker and fixed-rate mortgage products, with new fixed rates coming into effect tomorrow. Rates on fixed-rate mortgages and tracker mortgages for customers of the bank’s Haven brand will also rise.

Now, a five-year fixed-rate mortgage costs 4.3 percent a year, while adjustable-rate rates will rise 0.35 percent from March 14, meaning an adjustable-rate mortgage with an 80 percent loan-to-value ratio will have an interest rate of 3.5 percent will.

The AIB’s quick action is a sign that Irish banks are beginning to pass on the full cost of higher base rates to mortgage customers, having largely held back.

“The timing of this announcement by AIB of an average 0.5 percent increase is unexpected as this is the bank’s third increase in five months,” said Michael Dowling, managing director of Dowling Financial.

“It’s also significant because this is the first ‘pillar’ bank to increase both its variable and fixed interest rates.”

AIB, Bank of Ireland and Permanent TSB have so far spared their adjustable-rate customers despite the ECB raising rates four times in the six months to December, and have only passed part of the increases to fixed-rate products.

However, AIB is making the changes against a background of improving economic prospects with falling inflation, low unemployment and improving growth indicators.

Now, a 5-year fixed-rate mortgage costs 4.3 percent per year, while adjustable-rate rates will rise 0.35 percent from March 14, meaning an adjustable-rate mortgage with an 80 percent loan-to-value ratio will have an interest rate of 3.5 percent will have.

The changes put AIB’s prices above those of the Bank of Ireland, which has increased its mortgage rates more slowly to gain market share.

But bank shareholders have lobbied for higher prices as the average interest rate charged in the Irish market was among the lowest in Europe after having been the most expensive for many years.

However, Irish banks were still able to post substantial net interest gains by parking excess deposits with the ECB and earning a whopping margin on the small amounts they paid Irish savers as interest.

In response, the Bank of Ireland was ultimately forced to raise its fixed rate rates in January.

The improvement in revenues prompted both AIB and Bank of Ireland to raise their mid-term profitability forecasts in late 2022.

Now AIB is also sweetening the terms for savers, who will receive more attractive deposit rates on a range of variable banking products from the middle of the month.

In a big push for online savers, AIB is increasing the amount it pays on regular monthly savings up to €1,000 per month from 0.1pc to 1pc.

Accounts with seven days’ notice will now attract 0.25 percent interest instead of zero, while demand deposits will pay 0.1 percent per year.

The AIB had kept deposit rates near zero for years while the ECB’s deposit rates were negative, a policy that cost the bank millions annually.