Irish homeowners waited too long to switch their mortgages when the European Central Bank moved to increase interest rates in 2022, missing out on greater potential savings by locking into a lower rate.
According to a new report from the Central Bank, rather than move at a time when they can save the most money, Irish borrowers are more likely to be motivated to switch when they fear they might lose out by not doing so – ie, after interest rate hikes.
Irish borrowers have long had a less-than-desirable relationship with switching. Despite the obvious benefits to be had by exerting competitive pressure on lenders, which can lead to better rates for all, the cumbersome nature of switching has made mortgage holders slow to do so.
Now this report shows that Irish borrowers also have a preference “to insulate from potential increase in future monthly repayments”; but could they save more by taking a more proactive approach to switching, rather than making a move only when they fear a sharp increase in their monthly repayments?
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After all, this is not always the best way to save money. The Central Bank report notes higher switching activity after July 2022, when the European Central Bank first increased interest rates after years of zero rates, “despite the immediate monetary benefits from switching declining as interest rates rose”. In July of that year, the ECB increased rates by 0.5 per cent, swiftly followed by further hikes, which means that rates currently stand at 4.5 per cent – with expectations now growing that a decrease may be on the way.
But back to 2022; if homeowners had opted to switch ahead of this monetary policy tightening move, they would have benefited from “much larger” immediate interest rate gains. However, switching during this period was “more modest”, the report notes.
Indeed interest rate savings fell from 1.1 percentage points in July 2022 to 0.4 percentage points in December 2022, and was more notable across the non-bank sector, falling from 1.2 percentage points in July 2022 to 0.4 percentage points in December 2022.
The best time to switch, according to the report, was April 2022, just ahead of the interest rate rises, when there would have been gains of 1.3 percentage points. According to data from the Banking & Payments Federation of Ireland (BPFI), however, just 775 homeowners made the switch that month. Contrast this with July, the month of the rate hike, when some 1,549 borrowers made the switch.
The greater savings may have been for those switching from non-bank lenders – such as Finance Ireland and ICS Mortgages etc – as they responded more rapidly to monetary policy changes. Banks on the other hand, continued to offer lower interest rates, “reflecting slow pass-through of ECB policy rates into bank lending rates”.
Nonetheless, borrowers who made the move did save money. According to the report, a homeowner with a median valued mortgage would have enjoyed savings ranging from €1,000 to more than €1,500 from September 2018 to December 2022. Those with larger mortgages would have saved up to €4,000, while those with the lowest outstanding borrowings would have saved about €500-€1,000 a year.
[ Where next for Irish mortgage rates, and when?Opens in new window ]
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