Mortgage holders enter era of rising repayments as ECB announces rate hike

Almost half a million variable and tracker mortgage holders in the Republic are facing increased monthly repayments on their home loans in wake of the European Central Bank’s (ECB) decision to begin raising interest rates from next month.

The ECB said it planned to raise its base lending rates by 0.25 percentage points in July to counteract the current surge in inflation and by a similar amount in September, but it left the door open for an even bigger incremental increase in September if the “inflation outlook persists or deteriorates”. The July move will be the ECB’s first rate increase in more than 11 years and marks a sea change in monetary policy across the euro zone.

The policy shift came as Ireland’s cost-of-living squeeze intensified last month, with headline inflation rising to a near 40-year high of 7.8 per cent on the back of further price hikes in energy, transport and food.

[ Q&A: What would ECB interest rate hikes mean for you and your mortgage? ]

[ Mortgage hikes to come as ECB announces interest rate increase ]

Those on tracker or variable mortgages will likely see an increase in their monthly repayments either instantly in July or within a few months as lenders pass on the ECB rate increase, mortgage broker Michael Dowling said. The proposed quarter-point increase would add about €40 to the current monthly repayments on a typical €300,000 mortgage, he said, while a 0.5 percentage point increase would add €80 to monthly repayments.

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While the increases are not huge, “it’s the start of something bigger,” Mr Dowling said, noting this was the fourth large item on monthly household bills – along with energy, transport and food – to rise significantly in recent months.

Markets are expecting even more aggressive action from the ECB to combat inflation, pricing in 135 basis points of hikes by the end of this year, or an increase at every meeting from July, with some of the moves in excess of 0.25 percentage points. Mr Dowling said a move of 1.35 percentage points would add €221 to monthly repayments on a typical €300,000 mortgage and €442 for a €600,000 mortgage.

The Central Statistics Office’s latest consumer price index, meanwhile, showed consumer prices rose by 7.8 per cent in the year to May 2022, the sharpest rate of price growth seen in the Irish economy since the third quarter of 1984, heaping further pressure on household finances.

The fast-rising cost of energy, housing and transport all contributed to the overall surge in the cost of living, with energy and housing prices once again the largest drivers of inflation in May.

Minister for Finance Paschal Donohoe has, however, ruled out further controls to aid families in countering the surging cost of living, indicating he was not considering price controls or “measures in that regard”.

Mr Donohoe argued that they would not work in an economy as small as the Republic’s and would have to apply across the European Union to be effective. The Minister also pointed out that the “money had to come from somewhere” to make up the difference between goods’ actual cost and the controlled prices at which they would be sold.

“The taxpayer will fund that difference,” Mr Donohoe said, while noting the Government had already introduced anti-inflation measures worth €2.4 billion, including cutting excise and some taxes on energy. Speaking at the publication of the National Asset Management Agency’s annual report, he predicted inflation would moderate towards the end of the year.