Monday 11 December 2017

Banks are playing dangerous game with homeowners

BANKS and building societies are playing a dangerous game with the finances of large numbers of families.

By pushing through rise after rise in interest rates for homeowners with standard variable mortgages, our lenders risk pushing people too far.

The move by Permanent TSB to impose a third hike in its standard variable rate, to be followed in weeks by other lenders imposing their second rate rise, will leave many householders on a financial knife-edge.

As many as 300,000 homeowners have standard variable rate mortgages -- a loan on which the lender can increase the interest rate at will.

Banks and building societies are punishing standard-rate customers with rate rises because they cannot get at those who have trackers or fixed-rate home loans.

People with trackers have a contract that means the lender can only increase the rate when the European Central Bank increases its key rate. This hasn't happened for 14 months.

Six out of 10 mortgages of the main lenders are trackers and most lenders are losing money on them because of the elevated cost to them of raising money in wholesale markets.

But those with trackers will not escape mortgage pain either. The ECB is set to increase its rates sooner than expected.

Yesterday an index which measures German business confidence recorded the strongest rise for 20 years in July. The Ifo index of business sentiment rose to 106.2 points from 101.8 in June. Germany's economy shrank by almost 5pc last year but has been recovering.

If the countries that make up the eurozone were not experiencing the worst recession since World War II, a jump like that in the Ifo index would immediately prompt the governors of the ECB to increase its key rate.

The pickup in economic growth in the eurozone is welcome, but spells bad news for mortgage holders.

The Irish economy is showing signs of coming out of recession but households and the Government are hugely indebted.

Heavy levels of indebtedness in Ireland, Portugal, Greece and Spain, are factors to be weighed up by the ECB when considering a rate rise.


But the overwhelming concern will be to ensure economic growth does not bring a return of inflation.

This means that mortgage holders in this country, other than those on a fixed rate, could soon be reaching a financial breaking point.

In a recent poll by Irish Mortgage Corporation, almost half of those with a mortgage said a rise of €250 or more in monthly repayments would pose a significant problem for them. Frank Conway of the IMC said two or three hikes of 0.5pc each in standard variable rate, with an ECB hike would mean monthly rises of €250 or more for many mortgage holders.

It seems as if we are fast reaching that mortgage tipping point.

Irish Independent

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