Home owners face ‘crippling’ repayments after ECB rate hike

The European Central Bank’s (ECB) move to sharply increase interest rates could lead to “mass defaults”, one expert warned, as the spike in mortgage repayments combine with other cost-of-living pressures.

The ECB hiked rates again on Thursday, this time by 75 basis points. It had increased its main interest rates by 50 basis points earlier in the summer. Those moves are likely to have an equal, if not bigger, impact on people’s finances as the rising price of domestic energy, groceries and motor fuel.

When combined, the 50 basis points hike of the early summer and the 75 basis points hike announced by the ECB this week will see the cost of many typical home loans climb by well in excess of €1,000 over the next 12 months.

With more increases coming down the tracks, the effects “will be crippling for some and could lead to mass defaults on repayments when coupled with wider price inflation”, said Mark Coan, founder of financial services company moneysherpa.ie.

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Broken down, the numbers are stark.

The two rate increases amounting to 1.25 per cent will see a person on an average mortgage of €200,000 worse off by about €107 a month or just under €1,300 over the course of 12 months.

Financial markets are anticipating another rate increase before Christmas – in the region of 50 basis points – and, were that to happen, a person with 15 years left on an average sized mortgage would be paying €1,884 more over a 12-month period than they were in the years up to June 2022.

Others will feel even greater pain.

A homeowner with a tracker of €100,000 and a rate of 0.5 per cent plus ECB rates to be paid off over the next 10 years was paying in the region of €855 a month but that will jump to €909 as a result of the increases – a jump of €54. By the end of the year, payments are likely to hit €931 – a monthly increase of €77.

Someone with a tracker worth €300,000 with the same rate of 0.5 per cent plus ECB rates was paying €2,564 each month up to June of this year but is now paying €2,727 and is likely to be paying €2,794 by the end of the year, a monthly increase of €231, which amounts to €2,772 annually.

As the size of a mortgage climbs, the picture becomes increasingly bleak.

A person with a variable rate of 3.6 per cent on a mortgage of €400,000 spread over the next 15 years is paying about €2,879 each month now and will most likely have to pay €3,079 in the weeks ahead rising to €3,132 by the start of next year, a monthly increase of €253.

Spread over the course of a year, that mortgage will cost €3,036. However, looking at the lifetime of the loan, the borrower will be worse off by just over €45,000.