The era of ultra-cheap money and record-low interest rates has finally come to an end.
The European Central Bank (ECB) has increased interest rates for the first time in 11 years.
It has hiked its main lending rate by a larger-than-expected 0.5%. Its biggest hike in over 20 years.
The ECB has kept rates at a record low of 0% since 2016 and last increased its rates way back in 2011.
However with inflation at record levels throughout Europe, the central bank has felt compelled to act.
The ECB's deposit rate, which it charges banks for keeping excess money on deposit with it, also increased by 0.5% to 0%, bringing it out of negative territory. This means banks will no longer be hit with costs for keeping money with the ECB.
What will the impact be?
Those with tracker mortgages are likely to see an almost immediate increase in their monthly repayments.
However it remains to be seen if banks will pass on the rate increase to their variable-rate customers.
Mortgage rates in Ireland are currently well above the Eurozone average, and have been for years, leading to calls from some, including bonkers.ie, for the banks to absorb some of the initial hikes.
The average rate on a new mortgage in Ireland is 2.73%, compared to only 1.76% on average in the Eurozone. However the average new variable rate is over 3.50%!
Already AIB, Bank of Ireland, and Permanent TSB have said they won't be increasing any of their variable rates - for now at least.
As well as affecting mortgage rates, today’s news is likely to put upward pressure on the cost of loans, overdrafts and credit cards in the medium term.
Those on fixed rates won’t see any change to their repayments though. At least for now. However if you’re on a fixed rate you’re likely to be faced with higher rates when you come to the end of your fixed-rate period.
How much extra will I be paying?
How much extra you'll pay depends on the size of your mortgage, how many years you have remaining, and the interest rate you're currently paying.
But let's say you’ve €200,000 left on your mortgage over 15 or 20 years, you’re looking at paying around an extra €45 to €50 a month.
It may not seem like a lot, at least initially, but the ECB is likely to raise rates to 1% or more over the coming months. If this comes to pass, some people are looking at paying hundreds more each month.
Here’s a look at how an increase in rates will affect some customers. For example, if you've €200,00 remaining on your tracker mortgage over 15 years and you're paying a 1% margin, you're looking at paying an extra €44 a month after today's 0.5% hike.
If you've €300,000 remaining on your variable-rate mortgage over 25 years, you'd pay an extra €79 a month if your bank passes this on.
|€200,000||15 years||20 years||25 years|
|€300,000||15 years||20 years||25 years|
*Based on someone currently paying a variable rate of 3.5%
|€200,000||15 years||20 years|
**Based on someone currently paying a margin of 1%
Why is the ECB increasing rates?
The ECB is trying to rein in record inflation, which is running at almost FIVE times its target, by cooling the economy.
However the ECB, like all central banks, is in a bit of a bind. Rapidly rising energy prices, due largely to the war in Ukraine, and supply chain bottlenecks due to Covid, are behind much of the recent uptick in inflation. However these problems won’t be solved by raising interest rates.
Indeed many argue that record energy prices, which have added thousands of euro to people’s heating, lighting, and transport costs throughout Europe, are already acting as a drag on growth and cooling the economy anyway, and that an increase in rates is just adding further misery to consumers’ finances when they can least afford it.
Either way, the ECB has a delicate balancing act in trying to tame inflation over the coming months without inducing a prolonged recession. Unlike other central banks, it also has to weigh up the economic situation in 19 different nations.
The big difference in interest rates between the Eurozone and the USA may also have been on the ECB’s mind. This difference is a key reason why the euro has lost so much of its value against the dollar in recent months (about 15%). Increasing rates, especially by a wider-than-expected 0.5%, should lend some support to the euro over the coming weeks.
Price pressures are spreading across more and more sectors. Most measures of underlying inflation have risen further. We expect inflation to remain undesirably high for some time.
Chrisine Lagarde, ECB president
Have other central banks increased rates?
Yes. By a wide margin. In fact the ECB is pretty far behind the curve when it comes to raising rates.
The US, UK, Canadian, Swiss, Australian and New Zealand central banks have all raised rates significantly over the past few months.
Here’s a look at how rates currently compare in the world’s main economies.
Tough time for households
Today’s news comes on the back of skyhigh inflation in Ireland.
Food inflation is running at close to 7%, according to the CSO, while people’s energy bills have increased by around €1,500 a year in recent months.
Meanwhile petrol and diesel is still well over €2 a litre.
And now some households will have to contend with higher mortgage repayments.
In better news, people with savings are likely to see slightly better returns over the coming months. While the increase in rates is likely to cool property price growth.
Banks will also welcome the move to exit negative rates as it will boost their profitability.
Households with a variable-rate mortgage should look at switching into a longer-term fixed rate. Usually you don’t even need to switch mortgage provider to do this. You can just ring your existing provider and tell them you want to move onto a fixed rate. Fixed rates of up to 30 years are now available with some lenders, often at rates which are more competitive than variable rates.
So you’re getting peace of mind, better value and certainty that your repayments won’t increase. A real win-win.
Those on trackers are likely to be better off staying on them – for now at least. But it’s important you do the math and get good advice. Depending on how high rates go, the margin you're paying, and how long you have remaining on your mortgage, it may make sense to leave your tracker and lock into a fixed rate in the near future.