Irish mortgage rates in surprise fall

Since last July the European Central Bank (ECB) has embarked on an aggressive path of interest rate hikes in an effort to cool rampant inflation

Rates have gone from 0% to 3.50% in less than a year and are likely to go even higher over the coming months.

It's no surprise then that mortgage rates all over Europe have shot up.

For example, in late 2021, the average rate across all countries in the Eurozone was 1.27%. It's now 3.33% - meaning it's almost trebled in the space of around 18 months.

Some countries have fared even worse. The average rate has gone from just 0.70% to 3.90% in Finland and from 0.80% to 3.64% in Portugal over the same time period for example.

However, rates in Ireland have crept up much more slowly. And surprisingly they even fell slightly last month according to the latest Central Bank figures.

So what's going on?

What the figures say

In February, the average interest rate on a new mortgage in Ireland was 2.92%, which was down fractionally from 2.93% in January.  

Ireland and Malta were the only countries in the Eurozone to see their rates fall and it means Ireland has the third cheapest mortgage rates in the region with rates well below average.

Compared to 18 months ago, rates here have only gone up by around 0.20 percentage points - much smaller than the increase seen elsewhere in Europe. 

Here's a look at how rates compare across a range of Eurozone countries. 

Why are mortgage rates in Ireland rising so slowly?

Firstly, it needs to be acknowledged that rates in Ireland were already very high to begin with. Up until the middle of last year, Ireland had among the most expensive rates in the Eurozone. And had done for years.

Perhaps because of this, the main banks have been slow at passing on the ECB rate increases to mortgage customers. 

As mentioned, since last July, the ECB has hiked rates by 3.5 percentage points. However the main banks have only hiked their fixed rates by around 1.5 to 2 percentage points on average. And variable rates have hardly moved at all.  

This is obviously good news for those on variable rates as well as those hoping to get on the property ladder over the next year. 

However this 'generosity' from the banks has largely come at the expense of savers. Savings rates in Ireland are still miserable. The best rate is just 1.50% with PTSB. And BOI only pays a maximum of 0.75%. However deposit rates over 3% are now widely available in Europe.  

In essence, savers are now heavily subsidising mortgage holders. Whether that’s right will differ vastly depending on whether you talk to a mortgage holder or someone with big savings!

The other related point is that Irish banks are awash with savers' cash right now. This is due to big savings built up by households during Covid as well as all the billions that was transferred to AIB, BOI and PTSB after the exits of Ulster Bank and KBC. The main banks are able to use this money (on which they're paying little interest as highlighted already) to part fund their mortgage lending cheaply. 

Also, these figures are based on mortgages drawn down in February but which may have been applied for several months before.

Anyone who applies for a mortgage today will be faced with much higher rate options. For example the lowest variable rate for a standard first-time buyer borrowing €270,000 with a 10% deposit is 3.15% with Haven. And the best fixed rate is 3.40% with Bank of Ireland or Avant Money. Mind you - these rates are still competitive compared to rates on offer elsewhere in Europe. 

Also, the Central Bank figures also only take into account mortgages drawn down with AIB, BOI and PTSB. The non-bank lenders such as Avant Money or Finance Ireland etc aren’t included in these monthly figures. If they were, the average rate would be higher.  

What's in store?

Looking forward, the ECB is likely to hike rates again next month - but perhaps by just 0.25 percentage points this time. But this still means more hikes from all lenders are almost guaranteed over the coming months.

By the end of the year the best mortgage rate is likely to be around 5%.

This means repayments for prospective first-time buyers and tracker customers will get even more expensive unfortunately. 

Will property prices fall?

Higher mortgage rates are likely to significantly cool the property market. Indeed prices have already fallen by 1.60% in Dublin over the past three months according to the CSO.

However, to maintain the same affordability as last year, prices would need to fall significantly (by up to 30% or more) to fully compensate for the 3.50 percentage point rise in interest rates – presuming the full ECB hikes are eventually passed on. 

We discuss the potential impact of rising rates on property prices in this in-depth article here.