Monday 20 November 2017

Mortgage divide

ECB to hold rates until 2012 but 300,000 still face hikes

Charlie Weston

Charlie Weston

MORE than 400,000 homeowners with tracker mortgages will benefit from record low interest rates for up to two more years.

But those on variable rates will pay the price in higher rates to compensate banks for losses they incur on tracker packages.

It means that the gap between monthly repayments on an average tracker mortgage and an identical variable one now stands at €150 a month -- and it will continue to widen.

The European Central Bank (ECB) yesterday indicated its key interest rate would not rise from its record low level until 2012 at the earliest.

However, an estimated 200,000 to 300,000 people with standard variable rate mortgages, who have already suffered several interest rate rises this year, are set to face even more hikes.

The repayment divide is highlighted by the example of two homeowners with identical 25-year mortgages of €250,000.

The difference between their monthly mortgage repayments now stands at €150, assuming the tracker rate is 2.1pc and the variable rate is 3.5pc.

But this is expected to widen to up to €200 a month as lenders impose a new set of increases on standard rates later this year, well ahead of any rate rise from the ECB.

Five lenders have imposed rate hikes this summer on standard variables, the second spate of rises this year.

A sixth lender, Permanent TSB, has imposed three rises in standard variable rates since last summer.

Now experts say standard variable rates are set to rise again, while tracker mortgage rates are unlikely to go up until well into 2012.

Those with standard variable rates are effectively cross subsidising those on trackers. This is because banks are losing heavily on trackers.

However, there has been some evidence that homeowners with variable rates are acting to fix their borrowing costs.

Some tracker rates are set as low as 0.5pc above the ECB rate. With the ECB rate at 1pc for the past 16 months, this meant a mortgage rate of just 1.5pc.

The wedge between the repayments for someone on a tracker compared with a standard variable was labelled "mortgage apartheid" last night by Frank Conway of the Irish Mortgage Corporation.

Mr Conway said standard variable rates would rise again in the next few months because of losses being suffered by lenders and because of high borrowing costs for banks and building societies.

He added that a rise in ECB rates would have allowed lenders to camouflage rises in standard variable rates.


Rachel Doyle of the Professional Insurance Brokers' Association said that eight out of 10 mortgages issued in the second half of last year were variable, leaving householders vulnerable to unilateral rate hikes being imposed by banks.

Yesterday, the ECB left its key interest rate at 1pc for the 16th month in a row.

ECB president Jean-Claude Trichet said that rates were "appropriate", signalling no immediate plan to raise them.

Economists said that the indications from Mr Trichet were that a rise in eurozone rates was now further away than before.

Goodbody economist Dermot O'Leary said the message from yesterday's meeting of the ECB was that a rate rise was unlikely before 2012.

He added that money markets were not pricing in a rise in rates before then.

Mr O'Leary said that eurozone banks were still in a fragile state and continued to need financial support from the ECB.

The moves by a number of European countries to impose cutbacks in expenditure would dampen down the prospects for economic growth.

This in turn would remove the risk of inflation rising sharply in the 16-member eurozone.

The ECB's main concern tends to be the threat of inflation, with rate rises used to suppress that.

Irish Independent

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