Lenders undecided on impact for Irish customers

Mortgage borrowers on tracker loan rates will see their repayments rise next week following yesterday's decision by the European Central Bank (ECB) to increase its key interest rate for the first time in five years.

The quarter point increase, the first rise in rates since October 2000, has led to predictions of further interest hikes next year that could leave around 50,000 vulnerable borrowers struggling to meet their loan repayments.

However, none of the Republic's 11 lenders have yet decided whether they intend passing on the increase to their standard variable rate customers.

Permanent TSB, one of the largest lenders, said it was monitoring the situation. Bank of Ireland said it would discuss the ECB's move in due course, while a spokesman for EBS Building Society said it would be reviewing its rates over the next few days. Customers on popular tracker mortgages rates, which are set at a fixed margin above the ECB rate, will see their repayments rise automatically. On a typical €250,000 mortgage being repaid over 25 years, repayments will rise by €33 a month.

Bank of Ireland, its subsidiary ICS Building Society and IIB Homeloans increased their fixed rates last month in anticipation of a rate hike. There was some good news for savers, however, as financial institution Northern Rock announced it would pass on most of the rate increase to its deposit customers from January.

The ECB rate increase from 2 per cent, where it has remained since June 2003, to 2.25 per cent comes into effect on Tuesday.

The ECB did not rule out further increases next year. IIB Bank's chief economist Austin Hughes predicts rates would rise to 2.75 per cent during 2006 .

A generous Budget and the maturity of Special Savings Incentive Accounts (SSIAs) would lessen the impact of higher rates on the economy, he said. But research by IIB Bank and the Economic Social and Research Institute suggests that a 1 per cent hike would leave 50,000 borrowers feeling "a significant pinch".

Niall Dunne, financial markets strategist at Ulster Bank, said it expected the ECB to increase rates again in February.

Estate agents Sherry FitzGerald and CB Richard Ellis both said the rate increase was unlikely to significantly upset the buoyant Irish residential property market, although Sherry FitzGerald said it could "temper price growth" and CB Richard Ellis conceded that further increases could put pressure on first-time buyers.

Marian Finnegan, chief economist at Sherry FitzGerald, said the rate change was more likely to influence borrowers' choice of mortgage than act as a barrier to buying property.

Mary O'Dea, consumer director of the financial regulator, said the rise in interest rates made it more important than ever for borrowers to shop around for the lowest interest rates on all of their loans.

Consumers should be aware that the ECB rate change could affect the amount of interest they repay on variable rate personal loans, Ms O'Dea added.

Fine Gael finance spokesman Richard Bruton said the regulator must now be vigilant to ensure banks do not take the opportunity to raise their margins at the expense of either depositors or borrowers.

Mr Bruton said the rate rise would impose a €300 million bill on families.

"While most households will be able to cope, there is no doubt that people who have entered into recent mortgages and who are highly geared with borrowings will face greater difficulty," he said, calling on the Government to index tax bands and credits in next week's Budget.