Tracker rates to stay low for years but more hits on way for savers
Published 11/03/2016 | 02:30
Pressure has intensified on banks to cut variable mortgage costs after the European Central Bank reduced its main lending rate to 0pc.
The reduction in the ECB rate will mean a gain of around €5 a month for a €200,000 tracker mortgage holder.
And rates are set to stay at this rock-bottom level for years to come.
But savers are to lose out as interest rates on deposits are due to fall further. Experts said we are reaching the point where banks may charge savers for minding their money.
As well as lowering its main lending rate, the ECB cut its deposit rate to minus 0.4pc, which means it will be charging banks more to deposit money with it.
This is in a bid to encourage banks to loan out spare funds to businesses and consumers, but banks are expected to react by continuing to reduce the interest they pay to savers.
Experts said the latest ECB moves meant banks here were making "exorbitant" profit margins on variable rates.
The chairman of the mortgage committee of the Irish Brokers' Association, Michael Dowling, called on the lenders to reduce their variable rates.
"I would call on banks that are borrowing money at 0pc to reduce their variable rates.
"They are making an exorbitant profit margin on variable rates by charging an average of 4pc," Mr Dowling said.
He said the best way to reduce rates was for people to switch lender, or for new entrants to put pressure on rates.
Already, Australian group Pepper has started mortgage lending here, with new lender Frank Money also hoping for Central Bank approval to enter the market. And low ECB rates are here for years to come.
Economist with Goodbody Stockbrokers Dermot O'Leary said: "The ECB main lending rate will stay at this level at least up to 2019, and maybe into the next decade."
Some 350,000 residential mortgage holders are on tracker rates, with 320,000 home loans on variable rates.
Trevor Grant of The Association of Expert Mortgage Advisers said the latest ECB move was unlikely to have any impact on variable rates.
"Some lenders are strongly promoting fixed rates to those customers on very high standard variable rates, but we would urge caution as the market is getting more competitive and borrowers should allow themselves the flexibility to switch to a lower rate should they qualify in the near future."
The move by the ECB to charge banks 0.4pc for depositing money with it may prompt domestic banks to stop paying any interest on savings, Simon Moynihan, of price comparison site Bonkers.ie, said.
Already, new savings rates are just 0.21pc, according to the Central Bank.
Bank of Ireland and AIB pay 0.01pc on demand deposits.
Mr Moynihan said: "It is also possible that banks will stop offering any returns on certain deposit accounts. Although I don't see banks introducing negative interest rates just yet, they may charge deposit maintenance fees - similar to those on current accounts."
"If the banks reduce deposit interest rates to zero, savers will lose money to inflation," Mr Moynihan added.
The ECB also expanded its quantitative easing, asset-buying activities to €80bn a month from €60bn.