Kieran McAuliffe of Provest looks at today’s ECB increase in interest rates – the seventh in a row – and has some advice for mortgage holders.
The Journal
4th May 2023
SO, THE ECB met in Frankfurt today, where, as expected, it increased interest rates for the seventh time since it began raising rates last summer.
Already the ECB has raised rates by a combined 375 basis points since last July (from -0.5% to the now 3.25%.
The news has sparked concern here in Ireland as rising interest rates could lead to an increase in mortgage arrears which will push some already stretched household budgets even further.
We expected the ECB to raise rates by 25 basis points today and indicate, as they did, an intention to hike further which will bring further bad news for mortgage holders. At the moment it is expected that the ECB rate will top out at 3.75% so further rate increases are on the cards.
Trackers
Mortgage rates have obviously increased significantly. For years, Tracker Mortgage customers benefited from extremely low rates but this has all now changed dramatically.
There are in the region of 250,000 tracker mortgage holders in Ireland. A tracker mortgage ‘tracks’ the ECB base rate and ranges between 0.5% above the base rate to 2%.
So what does all this mean for mortgage holders who are watching the outcome from today’s ECB announcement?
My advice to all tracker rate holders is that they should review their existing terms. One key question that our clients have been asking is that with interest rates on the rise, is it advisable to abandon your tracker mortgage and move to a fixed rate? Certainly, the answer used to be a clear ‘no’, but now the answer depends on a number of factors:
1. What type of tracker mortgage are you on?
2. What is the alternative Fixed rate?
3. What is the remaining term of your tracker?
4. How much can you afford your repayments to rise by?
The first thing to look at is if you are on a tracker mortgage that charges over 1% above the ECB rate you should think about fixing your tracker now as you are already paying more than you could on a fixed rate.
If, as expected, the base rate goes to 3.75% those paying a margin of 1% or less will start to look less attractive and fixed rates will likely have moved higher at that stage too.
The second thing we would say to clients is that there is no point in giving up a tracker to fix for a short period of time such as two to three years. Also, if your tracker margin is as low as 0.5%, you should probably not fix at all.
The likely future trajectory of fixed rates also needs to be factored into your deliberations and calculations. If a global economic slowdown comes about and inflation moves back towards the ECB’s target 2% rate then the ECB may cut rates again.
So, for those with low-margin tracker mortgages, it might be a case of short-term pain for long-term gain.
In summary, those on tracker mortgages should act now, review their options relative to their own situation and make an informed decision.
To fix or not to fix
The interest rate hike is not just affecting those on a tracker mortgage. Variable rate mortgage holders can often feel like the most vulnerable in the market to the increasing ECB rises but so far, on the back of the ECB increases, Irish banks have focused more on increasing fixed rates. This might be about to change.
If you are holding a variable rate mortgage, it’s important to get as much advice as you can and gauge just what monthly difference you would face if you fixed. Ask your lender about their fixed rate offerings.
First-time buyers who have been struggling for years to get onto the property ladder are being drawn into the firing line too as they are paying substantially more for a mortgage today than would have been the case if they were able to take out a mortgage before interest rates started to increase.
Having as large a deposit as possible will help but with the cost-of-living crisis making it harder and harder for them to save, a higher deposit reduces the mortgage size which can knock thousands off the interest they will pay or may even help them afford a property that the Central Bank rules may have put out of reach.
First-time Buyers only need to put down 10% of the property’s purchase price upfront but being able to put down more than this will obviously help.
First-time buyers should:
Save as much as they can themselves for a deposit
Reduce their outgoings as much as possible before applying for a mortgage
Review the Help to Buy Scheme and The First Home Scheme Ireland. The Help to Buy Scheme is a tax refund scheme whilst the First Home Scheme Ireland is an equity scheme
Can your parents assist? The ‘Bank of Mum and Dad’ that is so often referenced is still playing a huge role in funding the purchase of homes for sons and daughters in Ireland.
For anyone who is trying to work out the best option for them, whether they are on a tracker mortgage, a fixed-rate mortgage or a first-time buyer or if they’re wondering how today’s interest rate increase will affect them then I would advise that they talk to their local financial services provider, where there will be experts on hand with all the relevant information required. The last thing you should do now is bury your head in the sand and wait to see what the bank does. Arm yourself with good advice and information and get ahead of this financial curve.
Kieran McAuliffe is a Director at the financial services firm Provest. He is a Certified Financial Planner and a Qualified Financial Advisor, Tax Technician and a Retirement Planning Advisor. Provest is a financial services firm based in Cork city offering personalised financial advice and high quality customer service to those looking towards their retirement. The company manages and advises private and corporate clients on a range of items from pensions and life cover to investments and retirement planning.