Tuesday 20 March 2018

How 200,000 families will pay for record cut in interest rates

Banks to hike price of variables to foot the bill for tracker loans

Open Window Gallery director Deirdre Irvine with a sculpture in the Dublin gallery entitled ‘Sighs of the Times’ by Eleanor Swan. Photo: Niall Carson
Open Window Gallery director Deirdre Irvine with a sculpture in the Dublin gallery entitled ‘Sighs of the Times’ by Eleanor Swan. Photo: Niall Carson
Charlie Weston

Charlie Weston

Up to 200,000 homeowners face hikes in their mortgage payments to help subsidise steep cuts in the interest rates of those on trackers.

About 375,000 people on tracker mortgages in Ireland stand to gain from the European Central Bank (ECB) decision to slash its interest rate to a record low of just 0.15pc.

But while they'll save around €10 a month on a €200,000 mortgage, households with variable rate mortgages are expected to see their monthly payments rise as banks seek to recoup losses.

The gap in monthly repayments between those on tracker and variable mortgages is now more than €300 – or close to €4,000 a year – on the same property.

Savers are also set to lose out, as banks are likely to continue to cut interest rates on deposits.

The historic move by the ECB was part of a package launched by its boss Mario Draghi in a desperate bid to stimulate the eurozone, and especially high-debt countries like Ireland.

This was the sixth cut in eurozone interest rates since Mr Draghi took over at the Frankfurt-based bank. The centrepiece of the ECB measures is the new cut to interest rates, but other measures included:

* A move to charge banks for depositing spare funds with the ECB in an attempt to force them to lend to viable businesses. It is the first time a major central bank has imposed "negative interest rates".

* Cheap funding for banks to encourage them to boost lending to firms. The total available to Irish banks could amount to €7bn, but economists said they are unlikely to sign up for the full allocation.

* A firm commitment to take even more radical actions, such as printing money, to ensure prices stop falling and the eurozone economies start to grow again.

Mr Draghi's attempts to refloat the eurozone economy have been prompted by weak economic growth and falling prices. He has also been concerned about the strength of the euro, which is making exports uncompetitive.

Modest price rises, rather than deflation, would help inflate away

some of the debt that is holding back economies like Ireland's.

But attempts to get the currency to fall back were initially unsuccessful, with the euro rising on international markets.

The clear early winners were the tracker mortgage holders, who see their payments go down every time the ECB cuts rates.

Their mortgage contracts state that they pay a set percentage, usually 1pc, over the ECB key lending rate.

It means that those fortunate enough to have picked up a tracker mortgage during the boom have enjoyed a far easier ride during the downturn.

They have experienced steady cuts in interest rates since summer 2008, when ECB rates were edging beyond 4pc.

The latest reduction should be worth around €10 a month to a family with a €200,000 tracker mortgage over 20 years, a modest saving of €120 over a year.

But the cumulative effect means that over the the past six years, tracker holders have saved around €6,000 a year.


In the meantime, banks have stopped offering tracker mortgages, limiting the options for first-time buyers.

Permanent TSB became the latest to shock homeowners last month when it said 70,000 borrowers will end up having to pay more on their variables.

Interest will jump from 4.34pc to 4.5pc, a move that will mean monthly repayments will go up by around €18 for every €200,000 of mortgage debt.

In contrast, some tracker holders will now end up paying interest of just 0.65pc.

A family with a €200,000 tracker mortgage spread over 20 years can now look forward to repayments coming down to €932 a month. But the same sized mortgage will cost €1,255 for those with a typical variable rate of 4.5pc.

If the difference was maintained over the remaining lifetime of the mortgage, it would amount to a massive €77,492 in additional interest.

Fianna Fail's Michael McGrath said Finance Minister Michael Noonan had a duty of care to protect vulnerable variable rate customers who were being "gouged" by their banks.

Meanwhile, mortgage firms were urging tracker holders to stick to their existing monthly repayments, despite the cut, in order to pay off the principal and save money in the future.

David Kelly, MD of HML Ireland, said that low interest rates provide an excellent opportunity for borrowers to pay down their loans faster.

But this advice has been disputed by consumer advocates, who argue that trackers are now so cheap it would be better to save the money.

However, savings rates are set to continue to fall – another side effect of the ECB cuts.

Bank of Ireland has become the latest to cut its deposit rates, with some now as low as 0.05pc.

Frank Conway of the financial literacy website Moneywhizz.org said savers were being punished. "Tax on earned interest was raised to a massive 41pc by the Government in the last Budget, which means that almost half of any income earned on interest is taken by government," he said.

He warned that variable mortgage rates may rise.

Economist with KBC Bank Austin Hughes said the ECB had done as much as it could – given the reluctance of some members to print money to stimulate the eurozone economy.

"It is probably the best that could be done in the circumstances. Mr Draghi is attempting to lead the banking horses to water but he can't be sure they will drink," he said.

Irish Independent

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