Happy days are here again for mortgage holders with interest rates are coming down, right?
Well, “happy days” is a bit of a stretch and it is also very wide of the mark to suggest interest rates are coming down for all mortgage holders. It is true to say, however, that the European Central Bank (ECB) has announced a rate cut of 0.25 per cent to its key rate, which will be welcome news for some people.
Some people?
Tracker mortgage holders, basically. There are more than 100,000 homeowners still on the loan arrangements that Irish banks were throwing around like confetti until the crash in 2008. And as you probably know by now a tracker mortgage is tied to ECB rates so when those rates go up trackers automatically go up and when the ECB rates go down, Irish mortgage holders’ tracker rates automatically go down.
Got it. Has the rate cut come as a surprise?
Not remotely, it was widely anticipated and it would have been a shock had the bankers in Frankfurt not cut rates by that margin.
So, what is the new ECB rate?
It has a number of different rates but the refinance rate is the one that is key to what you pay for your loans. It is currently 4.5 per cent and with this cut it will come down to 4.25 per cent which is still a long, long way off the zero per cent interest rates of times past.
And why has it cut its rates?
The ECB has long sought to steady inflation across the euro zone at a rate of 2 per cent. For a decade, inflation was running at substantially less than which is why rates fell to zero and, for banks depositing money with the ECB, even less than zero for long periods. Then, with the end of the pandemic and Russia’s invasion of Ukraine, inflation spiralled – to close to 10 per cent in some instances. That saw the ECB adopt an aggressive monetary policy with rates increasing 10 times in less than two years starting in July 2022.
What impact did that have?
That very much depends on a person’s circumstances. Tracker mortgage holders were the worst hit and there were few of that cohort who were left with much change out of €3,500 once the annual higher cost of their loans were totted up.
[ Cliff Taylor: Interest rates will remain high, even as the ECB starts cuttingOpens in new window ]
Ouch?
And those figures are net, so people needed to earn almost twice the level of the mortgage increases just to stay in the same financial position they were
And were tracker holders the only ones impacted?
No. Variable rate holders, and people with fixed-rate mortgages that were coming to the end of agreed terms, first-time buyers trying to climb on to the property ladder and people who had loans controlled by mortgage service providers – sometimes referred to as vulture funds – also had to confront a very different and expensive new reality as a result of ECB policies. Higher interest rates also restricted how much house-hunters have been able to borrow with the amount of demonstrated repayment capacity banks are looking for climbed by as much as €600 a month for a €300,000 mortgage
But that was then and now things are looking up. What will the rate cut mean?
It will mean very little – nothing really – if you have no mortgage or are on a long-term fixed rate. It will, most likely, mean very little if you are on a variable rate – at least in the short term. If, however, you have a tracker mortgage, you will stand to benefit from the rate cut almost immediately.
What does almost immediately mean?
Tracker holders will see their rates fall by the quarter point within 30 days.
And what benefit will that be?
Again, that depends on multiple factors – the key one being the size of the loan. The average tracker rate will fall from 5.9 per cent to 5.65 per cent which will amount to a reduction in monthly repayments of just over €13 per month for every €100,000 outstanding over a 15-year term. To save you having to do the maths, a person with a €250,000 mortgage will save around €33 a month or just over €350 a year.
But this is only the start of a downward spiral is it?
Spiral might be too strong a word but rates do look like they are heading down. The rate at which they do that very much depends on what happens in the broader economy – particularly in France, Germany and the other big players in the euro zone.
Is Ireland not a big player in the euro zone?
We might like to think so but in pure numeric terms we are quite the small fish.
Okay, so what is the ECB looking out for?
The ECB is likely to be cautious when it comes to rate moves and it has made it clear that it will continue to monitor inflation with the aim of getting it to that magic 2 per cent figure – right now it is 2.4 per cent. The ECB’s monetary policy committee meets again in July, September, October and December and in advance of these meetings data on inflation will be monitored. If inflation is stable or falling and/or economic growth is sluggish rates, may fall quicker than anticipated or they may fall more slowly if the reverse is true.
What’s your best guess as to what might happen?
Had you asked this question six months ago, we might have said there could be multiple rate cuts amounting to as much as 1.5 percentage points over the course of 2024. That seems like wishful thinking now. Most analysts are saying that – at best – the cumulative rate cuts between now and the end of the year will not be more than 0.75 percentage points. In that scenario, the mortgage holder with an outstanding loan of €250,000 would see their repayments fall by around €100 a month. That will still leave them worse off by more than €300 compared to the situation before the ECB started hiking its rates.
And what about variable rates and the fixed rates being offered by Irish banks, will they fall too?
Anyone who took out a mortgage after 2008 does not have a tracker rate and this ECB rate cut won’t automatically be passed on. While fixed rates being offered to new customers are now much higher than they were three years ago when 10 year fixed rates of as little as 2 per cent were on the table, they have, generally speaking, not climbed as dramatically as tracker rates. Rates of 3.5 per cent are available to certain borrowers. Variable rates climbed too but, again, not by as much as might have been feared. Many Irish banks have already announced rate decreases in recent weeks that have factored in the latest ECB decrease.
What about savers?
Banks were very slow to pass on the ECB rate increases to people with money on deposit – although there has been some upward movement on that front in recent months. The vast majority of the €150 billion Irish people have in savings is in instant access account offering virtually no interest so, rate cut or no rate cut, that won’t change. And while we can’t be certain what banks will do, their customers would not be happy if they cut their already mean deposit rates on the back of this ECB move.
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