Tracker mortgage rates rose automatically when the European Central Bank (ECB) increased its key interest rates in June. But most other rates stayed put. However, borrowing rates in general are likely to rise after Thursday’s interest rate increase.
The anticipated quarter point rise in the European Central Bank’s key deposit rate to 2.5 per cent is likely to trigger a string of announcements, as banks reprice parts of their loan books to reflect the ECB move. The increase in borrowing costs may not come immediately, but the direction of travel is clear.
Trackers, of course, by their nature will be hit again, with the 130,000 holders of these loans, most of them well into their mortgage term, seeing another rise. For someone with an outstanding balance of €100,000, the damage would be around €12 to €15 a month, add to a similar rise after the June rate change.
But market professionals also expect there will be changes elsewhere, notably in the fixed rate mortgage offers which are the bread and butter of competition for new borrowers and for switchers.
Why is this happening, will there be more hikes to come and what does it all mean for borrowers?
1. Why is the ECB moving? The ECB is increasing interest rates in response to a rise in the rate of inflation, last measured in the euro zone as running at 3.3 per cent in August, up from 2.9 per cent in July and well above the ECB’s 2 per cent target level.
The jump is, of course, largely due to an increase in energy prices about which the ECB can do nothing. Nor can it control the immediate knock-ons, with food inflation expected to rise next year. But what it hopes to do by increasing interest rates for a second time in 2026 is to limit the pass through to the wider economy and, by persuading businesses and consumers that it is serious about its inflation target, to influence behaviour and their expectations of future inflation.
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2. Will it push up interest rates further after the latest move? This is unclear. And there is a division of opinion between economists and those trading the market. Most economists do not believe the ECB will move further after the latest increase – in the short term anyhow. Most of the 65 economists polled recently by Reuters expect no further rise this year.
There are caveats, though and interest rates could rise further if there is another large upward move in energy prices – oil hitting €100 a barrel this week was notable – and signs that this is passing through into the wider economy.
Underlining the difference of opinion between economists and traders, forward interest rates on the markets still point to a further quarter point rise in December. Much will depend on the data in the meantime. For now, there are only limited signs of a wider spread of inflation and so called core inflation – excluding volatile items like energy – remains at 2.4 per cent. But December is a long way off.
3. What does this mean for Irish borrowers? There have been a few upward and downward cycles in interest rates over the years, and we are now in another upward one. Forecasting how far this will go and how long it will last is difficult, particularly as euro zone growth remains lacklustre and energy prices are unpredictable. Some economists expect that this will be a short upward cycle, with interest rates not increasing much beyond the latest move.
That would be relatively good news for borrowers. However, with lenders having held off increases after the June ECB hike – with the exception of trackers – “borrowers will not be so lucky this time”, according Michael Dowling of Irish Mortgage Brokers. He believes banks will move to push up many of their fixed rates, though by how much remains uncertain.
Competition is also a vital issue in the market and with bank margins – the gap between what they pay for funding and the rate they lend it out at – still healthy, Dowling believes the main banks will be keen to retain their competitive edge in their key target area, potentially limiting increases. At the moment, the best fixed rates available are 3 per cent, though most new or switching borrowers will pay 3.2 per cent or more.
Banks have a matrix of rates relying on factors including the loan to value ratio, the BER rating of the home and the size of the loan. Terms and conditions also differ.
We are likely to see some restructuring of these offers now with the average cost of a new loan moving up from its current level of just under 3.5 per cent and some of the lower offers close to 3 per cent disappearing. Broker John Fahy of Pangea Mortgages believes the banks may, in general, roughly match the ECB’s quarter point rise. That would still leave many first-time buyer and green rates in the low to mid-3 per cent range.
4. What can borrowers do? Time is now of the essence. There may be a short window for those wishing to switch as we wait for the banks to react to the ECB move and they give a period of time before the new higher fixed rates come in. New borrowers will hope to get deals through before higher rates come into effect.
“There are good fixed rate deals still available but the lowest fixed rates available today could become a thing of the past after the ECB increases its rate,” warns Trevor Grant, chairman of Irish Mortgage Advisers.
There has been a sharp recent rise in switching as borrowers anticipated the ECB rise.
Many recent switchers are likely to be those who were rolling off fixed rate terms agreed three to five years ago who will all be facing higher repayment costs, for many running to €100 a month or more. This is certainly a good time to examine options, particularly – as Rachel McGovern, Brokers Ireland deputy chief executive points out – as the loan to value ratio for borrowers may have fallen or the BER rating risen in the meantime.
Switching requires work and Dowling advises that it takes eight weeks and cost around €1,100 tom complete – so those who want to do so need to leave time. But it can be worth it.
Each borrower is different. According to McGovern: “While circumstances will vary, borrowers should consider fixing for longer.”
Irish borrowers continue to favour the three to five-year fixed term, though Dowling says there has been some interest in an offer from Avant of a 3.4 per cent fixed term of up to 30 years.
It is, of course, hard to judge where interest rates will be in even three years time, but it is a fair bet that we are unlikely to return to those of the extended period in the run-up to and during Covid-19 when borrowing costs were at super low levels.
Nor, we must hope, will ECB rates return to their 2023 highs, bar a major further surge in inflation. So we may stay in the middle ground, with the average rate for new loans in the 3.5 to 4 per cent range.
5. What is the wider impact: The group which will notice the difference most is the 70,000 borrowers rolling off fixed rates each year. Most will have fixed when interest rates were lower – often less than 2.5 per cent – and will face noticeable increases in repayments. Central Bank research showed rises of 5 to 10 per cent for those rolling off fixed rates when rates rose in late 2022 into 2023.
Those on tracker rates will also see a second hike in repayments – and it remains to be seen if ordinary variable rates will rise.
The third significant group, new buyers, are also going to face higher fixing costs. Higher interest rates will eat away at already-strained affordability. But with economic growth remaining steady and demand for housing exceeding supply, the impact on house prices may be limited. The demand and supply imbalance is still such that the likely rise in rates over the autumn is unlikely to impact the market materially, according to Fahy.
There is still significant demand and buyers at higher prices, according to Dowling, including those on higher incomes buying top-end properties. However, he does note signs of many in the middle ground hitting affordability barriers. How this plays out remains to be seen, but it would probably require a general setback in the Irish economy to send house prices into reverse.