Tracker mortgage holders in line for an unexpected bonus rate cut
Daragh Cassidy
Head Writer

Following the outcome of a long-awaited review of the European Central Bank's monetary operations, the rate off which trackers are priced is set to fall, gifting tracker holders a surprise bonus rate cut.

Tracker customers have certainly borne the brunt of rate hikes by the European Central Bank (ECB) over the past two years and will have seen their mortgage rate increase by 4.50 percentage points in a fairly short space of time.

And although the ECB is likely to start cutting interest rates over the next few months, a technical decision today by the central bank means tracker customers are going to benefit from a ‘bonus’ 0.35 percentage point cut in their mortgage rate in September.

The background  

The ECB has several different interest rates that it uses to influence the cost of borrowing in the wider Eurozone economy.  

Two of the main rates are the Overnight Deposit Rate and the Main Refinancing Operations Rate.

The Overnight Deposit Rate is currently 4% (though this is expected to fall over the coming months). This is the interest rate that the ECB pays to banks which leave money on deposit with it.

The Main Refinancing Operations Rate is the interest rate that the ECB charges banks which borrow money from it for more than one week. This rate is currently 4.50%, so half a percentage point higher than the deposit rate, and is the rate off which trackers in Ireland are priced. 

Most trackers work off a one to 1.20 percentage point margin, meaning most tracker holders are currently paying a mortgage rate of around 5.50% to 5.70%.

However the ECB has now decided that it wants to reduce the half a percentage point gap between its two main rates, which will benefit tracker customers.

Why the change? 

Traditionally the refinancing rate was targeted by the ECB to influence interest rates in the wider Eurozone economy. And this is why trackers in Ireland were priced off this rate (and not the lower deposit rate) as the refinancing rate reflected the cost of raising funds at the time trackers were being sold. 

But in recent years, without getting too technical, the deposit rate has actually become the ECB rate that influences wider interest rates or its 'main rate'. This is largely because the ECB pumped so much excess money/liquidity into the Eurozone economy during the 2008/9 financial crash, and then again due to Covid, that banks no longer needed to borrow as much from the ECB or each other. So this reduced the importance of the refinancing rate. It's also argued that all this money has led to the recent surge in inflation but that's an article for another day!   

As a result, the ECB has been undertaking a so-called 'operational framework review' of its monetary policy and operations in recent months given the changed circumstances. 

And the results have had a positive outcome for tracker customers in Ireland in one key area.

The outcome 

In short, the ECB has decided to reduce the difference between its two main rates to just 0.15 percentage points from 0.50 percentage points at present.

The ECB says it will make the change from 18th September.  

This will benefit tracker holders as banks are contractually obliged to pass on changes in the refinancing rate to those with trackers.

For a tracker customer with €200,000 left on their mortgage over ten or 12 years, they’ll save around €30 to €35 a month from this 0.35 percentage point reduction.  

Of course, in addition to this, the ECB is likely to start cutting its main policy rate too, which is currently 4% as mentioned above. This could be as early as June and the ECB could reduce rates by around one percentage point in total by the end of the year in addition to the 0.35 percentage point reduction to the refinancing rate.

This would bring the ECB's key policy rate down to 3%, and the rate off which trackers are priced down to 3.15%, and these reductions will automatically be passed on too.  

What about other mortgage customers?

The change to the refinancing rate is unlikely to affect other mortgage customers unfortunately. 

And even if the ECB starts cutting its key policy rate from around June, this doesn't mean that rates for other mortgage holders are necessarily going to fall either. At least not immediately. 

So far the main lenders have passed on less than half of the ECB rate hikes to their non-tracker customers. So it's unlikely they'll respond to any rate cuts - at least immediately.  

It could be into early next year before rates for variable and new fixed-rate mortgage holders start to fall. Though a lot will depend on the political and competitive pressures the banks come under.