Rate rises are on the cards

January is traditionally a depressing, sparkle-free time for householders as the Christmas comedown sets in.

If one of the side effects of the December excess is typically a financial one round your way, you won't be too cheered to know that it is likely that mortgage lenders will increase their interest rates in the new year with no regard for the perilous state of your finances.

The bearers of this bad news are the economists who interpret the soundings of the European Central Bank (ECB). The mortgage interest rates shown opposite are either formally or informally, directly or indirectly, linked to the ECB's interest rates, and happily for homeowners the base rate has remained at the 50-year low of 2 per cent since June 2003, despite the odd vague threat of an increase.

The ECB's inactivity is set to end, according to Dr Dan McLaughlin, Bank of Ireland's chief economist, who notes a "change of tone from Frankfurt" in the latest edition of the bank's Bulletin publication. He now anticipates that interest rates will be a quarter percentage point higher by the end of March.

Meanwhile, Ulster Bank's financial markets strategist, Niall Dunne, expects that the ECB will raise interest rates, not once, but twice in the coming months, with a 0.25 percentage point increase pencilled in for either January or February and a second 0.25 point rise probable next summer.

"A spike in inflation to a four-year high, a recent improvement in growth and hawkish comments from the European Central Bank have finally forced the market to accept that euro variable rates are about to rise," Dunne said earlier this week. What does all this mean for borrowers? Anyone who has fixed their interest rate recently won't be in the firing line, but anyone on a tracker mortgage will see their repayments increase automatically following any ECB announcement. For standard variable rate customers, the situation is less clear and depends on their lender.

But while lenders don't always pass on the full value of decreases in the ECB rates, they have in the past been only too quick to pass on the increases and tack a couple of extra percentage points on while they're at it. The only thing that might stop them from doing so this time is that standard variable rates are already significantly higher than tracker rates.

On a €200,000 mortgage being repaid at a tracker rate of 3.1 per cent over 25 years the current monthly repayments (before mortgage interest tax relief) are €959. If interest rates were to rise by a quarter percentage point up to 3.35 per cent, the repayments would edge up to €985. And if Niall Dunne's predictions come true and by the summer the ECB's base rate has climbed by half a percentage point, such a borrower's repayments will cross the €1,000 mark, rising to €1,012.

With higher prices in the capital, it is first-time buyers in the greater Dublin area who could feel the pinch the most. On a €300,000 mortgage being repaid over 35 years, the difference between 3.1 per cent and 3.6 per cent is €86 a month.

Strapped homeowners who fear these increases can console themselves with the hope that competition may heat up next year with National Irish Bank and Bank of Scotland Ireland both expected to introduce mortgages with market-beating interest rates as part of aggressive bids to win more customers.