Irish mortgage rates rise sharply in January as squeeze on mortgage holders tightens

The average interest rate attached to new mortgage agreements in the Republic shot up in January, rising 24 basis points in one month in response to the European Central Bank’s ongoing cycle of rate increases.

The latest data from the Central Bank shows the weighted average interest rate on new Irish mortgage agreements at the end of January was 2.93 per cent, up from 2.69 per cent in December. This leaves rates in the Republic at their highest level since October 2019.

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Despite the increase the average rates applied here were among the cheapest in the euro area, with only France and Malta recording lower rates than Ireland in January. The figures show the euro area average rose to 3.16 per cent, well over double the rate compared to this time last year.

“Over the past few months all the lenders have hiked their mortgage rates in response to increases by the ECB. And these hikes are now beginning to show up in the Central Bank monthly figures,” said Daragh Cassidy, head of communications at price comparison website Bonkers.ie

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“Initially the banks were slow to pass on the ECB rate hikes but this is now starting to change. And the average rate will shoot much higher over the next few months,” he said.

Permanent TSB this week hiked its fixed rates for the third time since November, leaving many of its rates for the average first-time buyer above 4.5 per cent.

The ECB is expected to opt for another half-point bump in rates next week, bringing its main refinancing rate, the one that affects mortgages, to 3.5 per cent, up from zero per cent last July, heaping further pain on the States roughly 315,000 borrowers, including tracker mortgage holders, on variable rates.

ECB chief economist Philip Lane has signalled the bank will continue to raise interest rates beyond March as it attempts to tame the current inflationary spike. Markets are expecting the ECB’s main rate to rise to close to 4 per cent by the summer.

“Until the middle of last year it was possible to get a mortgage rate as low as 1.9 per cent in Ireland – albeit with several caveats. By the end of the year the cheapest rate is likely to be over 5 per cent, with the average rate even higher. The impact this will have on affordability will be huge,” Mr Cassidy said.

“For example, borrowing €300,000 over 30 years at 5 per cent will cost €1,610 a month or around €500 more each month compared to someone borrowing the same amount at 1.9 per cent. Borrowing €300,000 at 6 per cent will cost almost €1,800 a month or around €700 extra each month. These are big sums of money. The question is whether buyers can afford the higher repayments or whether house prices will fall instead.”

Responding to the latest Central Bank data, Brokers Ireland said that while the weighted average interest rate on new Irish mortgages is almost a quarter percentage point (0.23 per cent) lower than the euro area average as a whole, it is showing increased upward momentum, having risen 24 basis points in one month, from 12 the previous month.

Rachel McGovern, director of financial services at Brokers Ireland, said given the number and level of increases announced by Irish lenders since January, the situation will have deteriorated for borrowers since then except those who are on fixed mortgages where lenders cannot increase their interest rates for the period of the fix.

“There are about 315,000 borrowers, including tracker mortgage holders, on variable rates. Just over a quarter of these are on trackers which automatically see increases when the ECB raises its rate,” she said. “The remainder are exposed to the decisions of their lenders, who while slow at the beginning to increase rates following ECB rate rises, are now moving more quickly to apply increases,” she said.

“While the remaining 400,000-plus mortgage borrowers are on fixed rates, over six in 10 are fixed for less than three years. Many of these will be exiting their fixed rates over the next year or two, and coming out into a very uncertain and worrying climate given the hawkish statements coming from the European Central Bank.”