Although it looks like the ECB has finally reached the end of its rate hike cycle, Irish mortgage rates are still likely to increase further over the coming months.
As a result of near record inflation (initially due to Covid supply chain bottlenecks and then the war in Ukraine) the European Central Bank (ECB) has hiked its main lending rate a record TEN times in a row since July of last year, taking it from 0% to 4.50%.
It’s the bank’s fastest pace of monetary tightening in its history.
But after its last meeting in September, the ECB finally signalled that it was likely to pause its series of rate hikes for now as it waited to see the full effects of all the previously announced hikes. Which will no doubt come as a relief to mortgage holders and those looking to get on the property ladder.
However it could be many months, or even more than a year, before the ECB starts to cut rates. And there's no guarantee the ECB won't hike rates again later in the year. It'll all depend on how far and how fast inflation falls, which is still running at over twice the ECB's 2% target.
And whenever the ECB finally does decide to cut rates, it may only do so slowly and gradually, and we may never get back to the ultra-low interest rates we saw for many years up until 2022.
But even if the ECB doesn’t hike interest rates any further, the main Irish lenders are still highly likely to increase their mortgage rates over the coming months. So be warned.
That’s because the Irish banks still have to react to a lot of the previously announced rate hikes.
Since last July, Irish mortgage rates have only gone up by around 1.5 to 2 percentage points. And variable rates with some lenders have gone up by even less (the exception of course is trackers).
In other words, banks here still have to pass on a lot of the ECB rate hikes. This is why Ireland went from having among the highest mortgage rates in the Eurozone last year, to having among the cheapest this year.
Whether you’re on a tracker, variable rate or a fixed rate, we look at what you can expect over the coming months.
If you’re a tracker customer you’ve certainly felt the brunt of the ECB rate hikes over the past year and will have seen your rate increase hugely over the past 15 months.
That’s because, under the terms of your mortgage contract, your interest rate has to go up or down whenever the ECB rate changes. In other words, your mortgage rate ‘tracks’ the main ECB lending rate - hence the name.
The main ECB lending rate is currently 4.50% - meaning if you have a tracker with a margin of 1% - you’re now paying 5.50%.
The good news is that your rate, and therefore your mortgage payment, is unlikely to go any higher over the next year. That’s because the ECB is unlikely to hike rates any further.
If, and when, the ECB starts to reduce rates, you’ll see your mortgage rate fall (usually within 30 days). However this may not be until early 2025 though. But the worst seems to be over for you.
Variable rates broadly track the ECB rate but competition and the make up of a bank’s funding will dictate how closely or quickly this happens.
If you’re a variable-rate customer you’ve probably seen your rate increase only slightly over the past year. By around 0.50 to 1 percentage point. And if you’re a Bank of Ireland customer your variable rate won’t have changed at all, which is remarkable given the ECB has raised rates ten times since last year.
But variable rates in Ireland were very high to begin with. Especially at Bank of Ireland. So the main banks had a lot of room to absorb some of the initial ECB rate hikes.
Irish banks are also currently awash with deposits. And until recently they were paying very little interest to savers and using the money to part-fund their mortgage lending cheaply as opposed to borrowing from the ECB. This helped keep mortgage rates low.
But this has changed in recent weeks as the banks came under huge media and political pressure to improve their deposit rates.
So with the ECB rate now at 4.50%, and banks paying much better rates to savers, it’s likely the main banks will hike their variable rates by around another 0.50 to 1 percentage point over the coming months, regardless of what the ECB does. So this is something you should be budgeting for.
The exception to this is if you're a customer with a non-bank lender such as ICS Mortgages or Finance Ireland - these lenders have already passed on the full brunt of the ECB rate hikes to their customers with their variable rates well over 6% already. This compares to variable rates of around 4% to 4.50% with AIB, BOI, EBS and PTSB for example. So if you're on a variable rate with one of these lenders, you may not see your rate go any higher.
If you’re currently on a fixed rate then your rate won’t change for the remainder of your fixed term. You have the peace of mind and certainty in knowing that your mortgage payment won’t change for the time being.
However fixed rates for new customers have increased quite significantly over the past year. In early 2022 you could get a fixed rate as low as 1.90% - albeit with several caveats. Today the lowest rate rate is 3.65%, with the average rate over 4%.
For the same reasons outlined above, even though the ECB is likely to have stopped hiking interest rates, it’s likely we’ll still see the main lenders hike their fixed rates for new customers by up to 1 percentage point over the coming months.
So if you’re a prospective first-time buyer, or only have one or two years remaining on your current fixed rate and will need to re-fix soon, you need to be aware that fixed rates haven’t peaked yet either.
Switch and save
One way to put some money back into your pocket and combat rising mortgage rates is to switch and save on your household bills.
And the good news is that we can help!