Friday 20 April 2018

AIB's 0.5pc hike to spark spate of mortgage rises

Charlie Weston and Joe Brennan

AIB, which has received a €3.5bn bailout from taxpayers so far, now plans to raise mortgage rates by 0.5pc before the summer.

The move will spark a domino effect across the banking sector as other lenders join the rush to push up their mortgage rates.

Unveiling massive losses of €2.3bn for 2009, AIB group chief executive Colm Doherty confirmed customers' worst fears yesterday when he said a rise in its mortgage rates was "unavoidable". The 0.5pc increase will add around €65 a month to repayments on a typical €250,000 home loan over 25 years.

But it will cost mortgage holders up to €15,000 in additional interest payments over the course of the loan.

Last night a spokesman for the Department of Finance said Minister Brian Lenihan was not in a position to do anything about the increases.

"It is just a reflection of the current conditions and the market reality," the spokesman said.

The minister earlier signalled that the Government would decide soon if further billions of taxpayers' money would be pumped into the banks after NAMA takes over the first tranche of their risky development loans.

But he insisted that the Government would take shares in the banks in return for any money which is pumped in.

"If the taxpayers put more money in they will own the banks," he said.

The minister said the results from Allied Irish Banks came as no surprise given the crisis that has hit the banking sector.

His comments came after Mr Doherty gave the clearest signal yet that he was planning to announce massive job cuts at AIB over the coming months, with speculation suggesting the group could end up axing more than 1,000 positions.

The bank's staggering losses of €2.3bn equate to more than €6m a day.

At the same time the bank said it would increase the rate it charged on standard variable rate mortgages for existing customers. It is also expected to hike interest charges on a range of other customer and business loans.

Bank of Ireland and the EBS building society are also weeks away from increasing their standard variable rates.

Last month Permanent TSB hiked its rates for existing standard variable rate customers. It was the second rise in six months and took the overall rise to 1pc.

Rates on standard variable rate mortgages are expected to have increased by 1pc by the end of the year. Mortgage holders face an additional headache later this year when the European Central Bank (ECB), which has kept its key rate at a record low of 1pc since last May, is expected to start raising the cost of borrowing at the end of this year.

Economists expect the ECB to nudge rates up to 1.25pc in the last three months of 2010, as the eurozone economy starts to rebound and inflation creeps in again.

Mr Doherty claimed that more money would be needed from taxpayers to fund AIB unless it hiked its interest rates.

He said the Irish banking system was "dysfunctional" as lenders were being forced to pay more for deposits than they were charging for mortgages and other loans. "This is unsustainable," he said.

Mr Doherty revealed three out of 10 of its mortgage customers were on standard variable rates, which banks are free to increase whenever they want.

Another 10pc have fixed rates, with 60pc of residential mortgage holders on trackers linked to the ECB rate.

AIB last week admitted it would no longer accept custom from those who want to shift their mortgages to it.

Its standard variable and fixed rates are the lowest in the market at the moment.

EBS boss Fergus Murphy said its "pricing has got to go up" on mortgages.

He added that the interest rate on mortgages was being reviewed on a daily basis.

"Irish lenders have the lowest variable rates on mortgages in Europe," Mr Murphy told the Irish Independent. A Bank of Ireland spokeswoman said its mortgages were "under constant review".

Bank of Ireland last week admitted it would hit its customers next month with a raft of increases in overdraft rates, personal loan rates and student loan rates.

Other banks are now expected to raise their personal loan and overdraft rates.

Michael Dowling, of the Irish Mortgage Advisers' Federation, said he expected the larger banks to push up variable and fixed rates in weeks, with lenders lining up to initially increase rates by 0.5pc to 0.6pc, to be quickly followed by a second rise of the same magnitude.

Irish Brokers' Association mortgage spokesman Gerry Stewart said hikes in standard variable rates would financially cripple those who could least afford it.

"Those with a strong financial position were typically offered tracker rates by the banks during the boom years, while the borderline applicants, with the least job security, were only offered standard variable rate mortgages," he said. "So it looks like those who can least afford this financial shock will be impacted the most."

Irish Independent

Business Newsletter

Read the leading stories from the world of Business.

Also in Business