Even without further official rate increases, which are expected, banks are tipped to increase their fixed-rate mortgages this year
Those rolling off fixed-rate mortgages will be concerned at what will happen to costs. Picture: Denis Minihane
There’s been a whirlwind of financial headlines: Inflation running at record highs, tech giants laying off thousands of people, energy bills soaring, and more recently major US and Swiss banks going to the wall.
It all comes as global central banks raise interest rates in a battle to curb spiralling inflation.
It may appear to have all kicked off with Russia’s assault on Ukraine, but it is perhaps not as simple as that. Whatever the reasons for global inflation, anyone in charge of a household budget has been pretty stressed.
The biggest household expense for most people is their monthly mortgage repayments. The European Central Bank has increased interest rates to levels not seen in more than 10 years, which means Irish banks have automatically increased tracker mortgage rates, affecting hundreds of thousands of Irish households.
Some people have opted to come off their trackers, and others have decided to ride it out. Only time will tell what the best choice has been.
Anyone who has taken a fixed-rate mortgage in the last year or so should be congratulated. Their worries about mortgage rates have been deferred until the end of their fixed-rate term draws closer.
Everyone else, and in particular people who will be rolling off a fixed-rate mortgage in the coming months, will be concerned. They will be worrying about what will happen to the costs of fixed-rate mortgages later this year.
Nobody knows for sure what the future holds for interest rate levels. Mortgage brokers can make educated guesses, but we do not have the power of seeing into the future. For what it is worth, here are my thoughts on the matter.
In the not-too-far distant past, there was a clear link between what the European Central Bank did with its official rates and the fixed and variable mortgage rates on offer from the Irish banks.
When the European Central Bank increased rates, the Irish banks would quickly increase their range of mortgage rates, and push up the costs for households repaying their loans.
However, more recently, as the European Central Bank has increased official rates, most of the banks have been slower to pass on these increases.
Their delay passing on official rate increases is for a number of factors, but one reason stands out. Mortgage interest rates for most banks are now more closely correlated to the deposit rates they offer.
Irish banks are still offering very low deposit rates, despite the large increases by the European Central Bank since last summer, and have been slow to increase their mortgage rates as well.
Banks have nonetheless increased their fixed-rate mortgages by some degree, and unfortunately the pace of their rate increases is gathering speed as they come under pressure to pay their depositors more.
In the summer of 2022, an Irish first-time buyer could have secured a five-year fixed mortgage rate at 2.2% for a loan-to-value of up to 90%. Today, the best equivalent five-year fixed rate is at 3.5%.
If banks were following the European Central Bank’s official rate increases, the best five-year fixed rate should now be around 5.75%. Picture: Michael Probst/AP
If the banks were following the European Central Bank’s official rate increases, then the best five-year fixed rate should now be around 5.75%.
The bad news is that there is a lot of room for the banks to increase mortgage rates. Even without further official rate increases, which are expected, the banks are still expected to increase their fixed rate mortgages in 2023.
Some banks operating in Ireland, such as ICS Mortgages and Finance Ireland, have different funding models and have already increased their fixed rates more dramatically.
As of today, the best five-year fixed rate for loan to value of up to 90% with Finance Ireland ranges from 6.45% and as high as 7.15%. That’s because these banks get their mortgage funding on the open markets and have been forced to raise their mortgage rates a lot more quickly as their costs of funding have increased.
That’s the bad news. The good news is that mortgage borrowers have options, and despite the exit of Ulster Bank and KBC Bank there is still competition in the Irish mortgage market.
The borrower can still seek out a better mortgage rate and reduce their mortgage repayments.
- Stephen Hamilton wrote this article on the Irish Examiner website.
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