While there are glimmers of good news in the latest missives from the European Central Bank (ECB), many thousands of Irish mortgage holders and would-be homeowners who have been relentlessly punished by 10 successive interest rate hikes will draw little comfort from any of them.
In its statement released on Thursday afternoon, the ECB suggested rates have reached their peak and, if they are “maintained for a sufficiently long duration”, will see euro zone inflation return to the magic 2 per cent the Frankfurt-based bank is aiming for.
While it is obviously good that the hit on many people’s personal finances seems less likely to get much worse, it is hard to overstate the scale of the penalties people already struggling with an enduring cost of living crisis have been asked to pay over the past 14 months.
The 0.25 percentage point increase in its main lending rates announced by the ECB will add about €300 on to the annual mortgage costs of tens of thousands of tracker holders – effectively wiping out the reductions in the cost of energy announced by suppliers in recent weeks.
However, it is the cumulative impact of the hikes that is most crippling.
The effect of the 10 increases since July 2022 will very much depend on the size of a person’s mortgage and the number of years left on it, although there are few homeowners who will have much change out of €3,500 when the annual higher cost of their loans are totted up.
Many people are likely to be substantially worse off than that.
And these figures are net, so people will have to earn almost twice the level of the mortgage increases just to stay in the same financial position they were in in June 2022.
What is likely to make the financial pill even more bitter and even harder to swallow, is that the high rates are likely to be with us for quite some time.
[ Cliff Taylor: ECB interest rate increases are probably at their peakOpens in new window ]
“Forecasters now predict rates staying above 4 per cent until 2024 then levelling out at between 3 and 4 per cent in 2025,” according to Mark Coan of moneysherpa.ie. “It’s very unlikely, therefore, we will ever see a return to the unprecedented rock-bottom rates we had from 2008 to 2022.”
He told The Irish Times that the dramatically changed landscape means people on trackers in 2025 “will still face average repayments of over €200 a month more than they did when the rate hikes started”.
And of course it is not just tracker mortgage holders – whose repayments are directly linked to ECB rates – who are paying dearly for the aggressive monetary policy.
Variable rate holders, and those with fixed-rate mortgages coming to the end of agreed terms, first-time buyers trying to climb on to the property ladder, and people who have loans controlled by mortgage service providers are also having to confront a very different and expensive new reality.
There are, Mr Coan said, “over 250,000 households on variable rates and those with fixed rates of less than three years [who] also face much higher long-term repayments as the banks’ variable rates are still to catch up with the ECB hikes”.
Irish Central Bank forecasts that 60 per cent of the current ECB rate will be passed through to variable rates, which will see variable rates rise to just over 6 per cent, Mr Coan said. “That will add €160 a month to the average variable rate customer and a jump of over €400 a month to those rolling off their fixed rates.”
Joey Sheahan of online brokers mymortgages.ie said the interest rate increases over the past 14 months have “wreaked havoc with existing mortgage holders and house-hunters alike”.
He said that higher interest rates have “restricted how much house-hunters can borrow as the amount of demonstrated repayment capacity banks want to see has increased by as much as €600 monthly for a €300,000 mortgage, meaning banks want to see mortgage applicants save a whole lot more each month”.
There are few first-time buyers who will be able to show an increase in annual earnings of more than €7,000 to satisfy the requirements of would-be lenders.
The impact of the hikes does not stop there, and for some people the consequences will be even worse.
According to Ronan Brennan of Delta Capita “the impact of ongoing and sustained loan interest rate rises is likely to increase the level of missed payments in [banks’] performing loan book.
“It is also likely to really challenge those customers already struggling with existing arrears or who have previously been in arrears. Customers who have fallen behind on their mortgage repayments in the past could therefore now fall back into arrears despite having managed to resume making repayments in recent years and so banks could see a reverse in the progress made on some re-performing loans.”
It is the impact on this most vulnerable cohort, the group who have been living with the pressure of severe financial stress for years, that will present the greatest of challenges in the months and years ahead.
