Irish mortgage rates shoot above 4%

New figures from the Central Bank of Ireland (CBI) show mortgage rates continue to rise, breaching 4% for the first time in years.

The average interest rate on a new mortgage in Ireland in June was 4.04%, up significantly from 3.84% in May. 

The 0.20 percentage point jump was the second biggest increase in the Eurozone.

Rates varied hugely across the Eurozone from as low as 1.93% in Malta to as high as 6.02% in Latvia.  

Despite the big month-on-month jump, rates in Ireland remain relatively competitive compared to the rest of the Eurozone for the time being. 

Why are rates going up? 

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.

The ECB's main lending rate has gone from 0% to 4.25% in the space of a year, and could go even higher over the coming months.

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

For example, in mid 2021, the average rate across all countries in the Eurozone was 1.27%. It's now 3.79% - meaning it's trebled in the space of around two years.

Some countries have fared even worse. The average rate has gone from just 0.70% to 4.36% in Finland and from 0.80% to 4.27% in Portugal over the same time period for example.

However, rates in Ireland have increased more slowly. However we're now beginning to catch up with the rest of Europe.

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

Why are mortgage rates in Ireland rising more 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 over four percentage points. However the main banks have only hiked their fixed rates by around 1.5 to two 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 fairly low. The best rate is 3%, though many accounts pay well below this. However deposit rates over 4% are now available in Europe.  

In essence, savers are 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 were 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 June but which may have been applied for several months before.

Anyone who applies for a mortgage today will generally be faced with higher rate options. For example the lowest non-green fixed rate from AIB and EBS for a first-time buyer borrowing €270,000 with a standard 10% deposit is 4.55% and with PTSB it's 4.75%. Mind you, these rates are still relatively competitive compared to rates on offer elsewhere in Europe.

What's in store?

Looking forward, there’s about a 50/50 chance the ECB will hike its main lending rate, off which trackers and mortgage rates are priced, to 4.50% when it meets in September. This means the average tracker customer could soon be paying a rate of around 5.60% or 5.70% while the best rate available to prospective first-time buyers will likely be over 5% by the end of the year.     

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 been falling in Dublin since last November, 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 4.25 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.