AROUND 205,000 MORTGAGE holders with either variable or short-term fixed rates could face rates as high as 6% in the next couple of years.
While tracker customers have borne the brunt of recent ECB rate increases. With the exception of vulture fund customers, variable and fixed rate customers have seen little or no increases to their mortgage repayments to date.
Now these customers risk sleepwalking into rates ranging from 5.6%-6.1% if they don’t act to fix their mortgage rates now for the long-term.
Irish banks have come under increasing pressure in recent weeks to increase the rates they offer to savers. International competitors are offering the best savings account returns right now, with German fintech Trade Republic offering overnight rates of 2% and Raisin.ie offering up to 3.6% on one year rates.
If Revolut was to introduce similar rates for its two million Irish customers then the Irish banks could see a large chunk of the €150 billion they have on deposit disappear overnight.
We have already seen Bank of Ireland increase its savings rates by 0.25% this month in an attempt to head this off, with more increases by all the banks likely to follow soon.
However, good news for savers is likely to mean bad news for borrowers as the banks look to preserve their profits on the difference they charge between both. We have already seen AIB hike its variable mortgage rates by 0.35% in March this year and further increases now look inevitable.
So how much are mortgage interest rates going to go up? The average variable mortgage rates in Ireland have remained steady at around 3.48%, in marked contrast to the increases seen elsewhere.
Given variable rates have been pretty much untouched so far in the face of a 3.75% ECB rate increase, it is theoretically possible that banks could look to put through ‘catch up’ increases of the full amount taking variable rates to over 7%.
This has already happened to over 30,000 variable mortgage rate holders with ‘vulture funds’, although increases like this for retail bank customers seem unlikely though given the way retail banks are actually funded and market pressures.
More realistically it would seem likely that increases will track those seen across Europe, where the Eurozone average mortgage rate has moved from 1.8% to 3.48% in the last year, an increase of 1.6%, which would take variable rates to around 5%.
As ECB rates haven’t yet peaked, then adding a further 0.5%-1% on top of that by the end of the summer seems sensible, giving us potential variable rates of around 5.5% to 6%.
According to recent mortgage statistics released by the Central Bank of Ireland over 100,000 mortgage holders with less than two years to run on their fixed rates and 100,000 already on variable rates are potentially exposed to mortgage rate hikes hikes as banks look to preserve their margins.
In terms of cold hard cash, variable rates increasing to 5.5% will add €111 a month to the average mortgage repayment and more than €17,000 in extra interest across the whole mortgage term if rates stay put.
At 6.0% repayments rise by €140 a month and the total interest bill will be more than €21,000 more.
It’s hard to predict how fast repayments will rise and if they will stay high, but most experts predict that the high interest rate environment will be around for some time and that rates will never return to the levels seen post the financial crisis.
If variable rates do start to rise as predicted, they will impact a whole new set of mortgage holders who have been isolated from repayment increases to date. As with the tracker customer repayments there is a real risk that by the time they wake up to the increases it will be too late to do anything about it.
If you are on a variable rate or a fixed rate with less than two years left to run you may still be able to act to avoid these hikes by switching your mortgage and fixing your rates long-term on the best mortgage rate. Fixed rates of up to 30 years are available at 3.95% from some lenders, such as the Avant Money, one mortgage which allows you to cap your mortgage repayments for your whole mortgage term.
At 3.95% the €140 a month hike in repayments would be cut to an increase of just €25 a month, as well as giving you absolute certainty on your future repayments. If interest rates fall you do risk missing out on any potential upside, but this needs to be weighed against the risk of falling behind making your mortgage payments if variable rates spiral upward.
As rates have been rising for the last 12 months it is extremely unlikely that you will incur a breakage fee if you choose to break your current fixed mortgage deal and fix your mortgage for a longer term. This is because EU rules introduced after 2008 limit when banks can charge breakage fees.
Check what rate you have and your remaining mortgage term with your current bank. Permanent TSB, Bank of Ireland and AIB have some of the highest fixed rates on the market right now, so don’t just fix with your current bank, check with a mortgage broker first who can compare all the lenders rates so you have the inside track on all your options.
Most importantly though, don’t just sleepwalk into higher rates and monthly mortgage repayments.
Mark Coan is a financial expert and founder of online money guide moneysherpa.ie. Email: mark@moneysherpa.ie. For more information on the campaign to raise awareness of the issues around mortgage prisoners contact Mark at mortgageprisoner@moneysherpa.ie.
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