LAST WEEK’S decision by two financial institutions to raise their standard variable rate mortgages – Permanent TSB by 1 per cent and Ulster Bank by 0.5 per cent – has given a lead that other banks and building societies seem certain to follow. The mortgage rate rise occurred against the background of the European Central Bank’s (ECB) decision to leave its base interest rate unchanged at 1 per cent. The ECB rate is, at least in the short- term, unlikely to rise despite signs of inflationary pressures developing in the eurozone. These two separate developments represent both good and bad news for mortgage holders.
Those with tracker variable rate mortgages – which account for the majority of mortgages – will be greatly relieved. There, the loan rate for borrowers is directly linked to movements in the ECB rate which has remained at 1 per cent for almost two years. On the other hand, holders of standard variable rate mortgages will be alarmed. In the case of Permanent TSB, the State’s largest home lender, the latest 1 per cent rate rise to 5.19 per cent will affect 80,000 borrowers. And for every € 100,000 borrowed, individual monthly repayments will rise by € 61.60.
The interest rate gap between tracker mortgages and standard variable rate mortgages widens further. Since 2009, Permanent TSB has raised its variable rate four times, while the ECB rate has not increased. The soaring cost of variable rate mortgages reflects the large losses by banks on their tracker mortgage loans, their difficulties in borrowing to finance lending and the need to meet higher capital standards set by the Central Bank.
The latest mortgage rate rise will put borrowers under greater pressure. It will push some deeper into negative equity and mean that arrears on loan repayments are likely to rise. It is a difficult situation, and one to which there is neither an easy nor an obvious solution. To date, in fairness, lenders have shown much consideration for customers with mortgage arrears, not least by allowing flexibility in restructuring loan repayments.
Fine Gael has outlined ambitious plans to provide mortgage relief for what the party characterises as “the negative equity generation”. Its proposal, to force state-supported banks that raised variable mortgage rates to reduce these by 0.25 per cent is well-intentioned. But that, unfortunately, may also provide banks with a perverse incentive to raise rates more quickly, and by a larger amount, in order to offset the impact of the Fine Gael proposal.