Banks will fill 'tracker gap' with rate hikes for 300,000
Banks will hike interest rates for 300,000 customers on variable rates this year as they try to make up for worsening losses on tracker products, experts have warned.
Borrowers on variable rates are already paying thousands more in interest as the gulf between their rates and tracker mortgages continues to grow.
Yesterday's decision by the European Central Bank (ECB) to drop its key lending rate to an all-time low of 0.5pc is a massive boost for around 375,000 homeowners with trackers.
But the cut means that the 'tracker gap' – the difference between the interest paid by borrowers on variable rates and those on trackers – is now at its widest ever.
On a typical €200,000 mortgage, the tracker gap stands at €3,360 per year – an increase of €2,424 in just the last 12 months. On bigger loans, the tracker gap is even wider.
The latest cut in tracker rates means a homeowner with a €200,000 mortgage will pay €24 a month less. Over a year, this saving is close to €300.
Some homeowners will now see their interest fall to a low of just 1pc.
Under tracker contracts, lenders are obliged to pass on any reduction in ECB rates. But banks can move variable rates in any direction, at any time.
The drop in tracker rates will mean the banks will lose even more money on these products and Michael Dowling, of the Independent Mortgage Advisers Association, warned: "Unfortunately, I see variable rates rising again."
Banks finance their mortgages with wholesale loans, typically over six months, that they get in the markets.
Banks finance their mortgages with wholesale loans, typically over six months, that they get in the markets. Wholesale money was cheap when trackers were launched in the last decade, but the cost of borrowing for banks has shot up in the past five years.
Mortgage lenders were attempting to counter losses on trackers by hiking fees and variable rates and cutting deposit rates. And this would have to continue if they are to return to profitability, Mr Dowling said.
Rachel Doyle of the Professional Insurance Brokers Association (PIBA) said: "Variable rates can keep on rising. We really don't know where they are going to end up."
Bank of Ireland/ICS, AIB/EBS, Ulster Bank, KBC Bank, ACC, and the former Irish Nationwide, said they were keeping variable rates under review.
But Permanent TSB said its new loan-to-value rates had been priced on the basis of an ECB rate cut. It is understood that AIB has no plans to pass on the latest cut to variable customers. Its rates will rise by up to 0.4pc from June. This follows two increases of 0.5pc each in variable rates at the end of 2012.
Karl Deeter of Irish Mortgage Brokers accused banks of imposing "hidden hikes" by deliberately not passing on the ECB reduction. He advised people on variable rates to consider locking in to a fixed rate.
ECB president Mario Draghi is attempting to drag the eurozone back to growth with the first cut in rates in 10 months. Economists did not rule out another cut later in the year.
Dermot O'Leary of Goodbody Stockbrokers said one last reduction was possible if the economies of the 17 countries that make up the eurozone did not return to growth.
"There is still room for another cut, but we are running out of room," Mr O'Leary said.
Interest rates in the US were at 0pc, while they were at 0.5pc in Britain, he said.
The economist said that if there were no signs of an improvement in the eurozone by the end of the summer there could be a new ECB reduction at the end of this year.
Mr Draghi said: "Weak economic sentiment has extended into the spring of this year. Our monetary policy stance will remain accommodative for as long as needed."
He stuck with the ECB's forecast that economic recovery will take hold later in the year but highlighted "downside risks" to that position. The ECB would "monitor very closely" all incoming evidence, Mr Draghi said, a phrase which in the past has suggested further policy action to come.
He added that there was a strong consensus to cut rates, indicating one or more policymakers did not agree.