Tracker mortgage rates set to stall until 2012
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Friday June 11 2010
HOMEOWNERS with tracker mortgages are set to be the big winners after it emerged yesterday that the European Central Bank's main rate is likely to remain at its current record low of 1pc for two years.
The European Central Bank (ECB) met yesterday and again left its key interest rate unchanged, with analysts predicting it will now be 2012 before rates start to rise again.
It is estimated that up to 400,000 mortgage holders have tracker rates, which can only rise when the ECB decides to change its key rate.
Some of those on trackers have rates as low as 1.5pc because they signed up for deals which give them a rate of the ECB rate plus 0.5pc.
After its meeting in Frankfurt, the ECB raised its forecasts for eurozone economic growth this year, but crucially it lowered the forecast for next year.
ECB president Jean-Claude Trichet told reporters the bank expected growth of 1pc this year and 1.2pc in 2011. In March, the ECB had estimated that the eurozone economy would grow by 0.8pc this year and 1.5pc next year.
Mr Trichet told reporters there was "unusually high uncertainty" surrounding the recovery, due to renewed tensions in some financial markets.
The chief economist at KBC Bank, Austin Hughes, said the international markets were not pricing in a rise in ECB rates for a few years.
"The markets do not see rates rising until 2012 and Trichet said nothing to disabuse the markets of that view," Mr Hughes said. He added that the economic forecast for the eurozone for 2011 had been revised downwards while inflation appeared to be staying low.
"So there is little to say that ECB rates will rise anytime soon," he added.
And mortgage broker body the Professional Insurance Brokers Association (PIBA) said rates were unlikely to rise for several months.
However, the fact that eurozone rates are unlikely to rise soon will not stop lenders pushing up other rates where they are free to adjust them.
The director of mortgage services at PIBA, Rachel Doyle, said people on variable rates and first-time buyers were exposed to rate rises of between 0.25pc and 0.5pc by the end of the year. Most lenders have hiked their standard variable rates for existing and new customers in the past few months.
Security
A rise of 0.5pc on a €300,000 mortgage over 30 years would push up monthly repayments by €82 if the interest rate rose to 4pc. Ms Doyle said interest rates were still at an all-time low.
"And there are still good long-term fixed rates available. We would recommend that those seeking security around the level of their future mortgage repayments should act decisively before the rates increase further. Fixing enables you to control expenditure at a time when disposable income is very important."
She warned, however, that the risk associated with short-term fixing of two to three years was that people could leave themselves exposed to a large jump in repayments within a relatively short period of years.
"Five years or longer at a value low rate is likely to yield the best value over the longer term."
Ms Doyle said that first-time buyers who wanted to get a foothold in the property market might be well-advised to move while some long-term fixed rates were still reasonable.
- Charlie Weston Personal Finance Editor
Irish Independent
