Tuesday 22 October 2019

Q&A: Are negative interest rates really likely - and will my mortgage get cheaper?


Dropping hints: ECB President Mario Draghi. Photo: REUTERS/Francois Lenoir
Dropping hints: ECB President Mario Draghi. Photo: REUTERS/Francois Lenoir
Charlie Weston

Charlie Weston

Official interest rates are already at 0pc, is it true they could fall further?

Yes, the European Central Bank's main lending rates are at 0pc. This includes the deposit rate, which it charges banks for keeping their cash, and the refinancing rate, which is the rate at which the ECB lends to banks.

ECB President Mario Draghi hinted at a cut to this rate recently. There has been speculation for ages that the ECB would cut its deposit rate to bring it into negative territory. This is to try to force banks to lend more.

The ECB is worried about poor economic growth in the eurozone, and low inflation.

Now markets are beginning to price in a cut to the refinance rate also. Markets reckon the chance of this is now 50-50, quite a dramatic change from what was expected earlier this year.


Yes, but will my mortgage rate fall?

Some four out of 10 mortgage holders have a tracker, which means the rate they pay is tied to the ECB refinancing rate.

Any cut in the refinancing rate will save them money.

The speculation is that the refinance rate may be cut to minus 0.1pc. This would mean someone with a tracker rate set at 1pc over the ECB rate would then be charged 0.9pc. That would mean savings of close to €170 a year for the tracker mortgage holder owing €300,000.


I have a variable, what about me?

The move by Ulster Bank to reduce one of its key variable rates is the first such move by any bank for more than a year.

Up to now all we have seen are cuts to fixed rates. Other banks are likely to cut their variable rates now that we seem to have entered a strange interest-rate declining era.

Any move by the ECB to opt for a negative refinancing rate will not have a direct impact on variable rates, but it will likely influence these rates. It then follows that fixed rates would fall too.

People on existing fixed rates are locked in to the end of the term, but new fixed rates will likely be lower.


But we still have very expensive mortgages in this country. Why?

More than a decade after the banking collapse we continue to pay way over the odds for mortgages. Interest rates on new home loans here are almost double that being paid by a borrower who is buying a home in, say, Spain, Austria or France.

The average interest rate on a new mortgage was 3.03pc in April, up slightly on what was charged the previous month. The difference in the average new mortgage rate in this country compared with the rest of the eurozone is €154 a month, which means there is room for lower rates.

Mr Draghi blamed a "quasi-monopoly" among banks here for the high rates when he addressed an Oireachtas committee in Dublin. Banks argue they are hamstrung by factors beyond their control which mean they cannot cut rates further. Regulatory rules mean they have to set aside huge amounts of capital for every €1,000 of lending compared with other eurozone countries.

This reflects high mortgage default rates since the economic collapse. Political moves to cap variable rates have been resisted by the Central Bank and the ECB.

Irish Independent

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