Wednesday 21 March 2018

Significant blow for mortgage holders: low tracker rates to rise

(Stock image)
(Stock image)
Donal O'Donovan

Donal O'Donovan

Homeowners are being warned to prepare for interest rate rises, as the era of cheap debt is set to end.

The Governor of the Central Bank warned that falling house prices could become a reality again.

The ECB rate is currently at zero - a boon to 350,000 Irish households lucky enough to have a tracker mortgage, linked by contract to the official rate.

But the powerful head of the German Central Bank said yesterday that improving economic conditions in the euro area could justify a hike in the European Central Bank interest rates over the next two years.

Bundesbank President Jens Weidmann said that conditions, including rising inflation in Germany, could now justify more normalisation of interest rates by 2019.

"The balance of risk might be more favourable today than it was before," Mr Weidmann said in an interview with Bloomberg TV.

Banking chief Jens Weidmann
Banking chief Jens Weidmann

The German central banker is a so-called "inflation hawk", and is known to fear the effects of low interest rates over extended periods.

Still, his views carry weight.

"People should be preparing for the possibility of higher interest rates," said Conall McCoille, chief economist at Davy.

Householders with tracker loans will be the first to see their mortgage costs rise, but others will also be affected.

Rate rises are unlikely in the euro area this year - but an increase next year of 0.5pc or 1pc would be plausible, he said.

"First-time buyers taking out loans now need to look ahead and consider where interest rates are going to be in two years, when they go to refinance. The chances are they will be higher."

It came as the Governor of the Irish Central Bank, Philip Lane, warned that buyers need to look realistically at the possibility that house prices, which have risen sharply since 2012, could go into reverse.

"There are a lot of downside forces facing the Irish economy. Anyone buying a home had better have enough of a deposit and make sure the loan is affordable enough to withstand downturns," he said.

"Housing is not a one-way bet and it would be a grave error for anyone to buy on the basis that house prices will only go in one direction.

"That is not true. There are many reasons house prices could go into reverse in the coming years."

Justifying Central Bank rules that cap how much people can borrow, Prof Lane also said evidence suggests people borrow too much, if they are allowed.

Read More: Analysis: If we're idiots, Mr Lane, it's because we are allowed to be

"A vast empirical literature shows that consumers tend to make poor financial choices, taking on too much debt, misunderstanding investment risk and choosing financial products that do not match their needs," he said.

That's in part because few ordinary consumers or investors make major financial decisions, like buying a house or taking out a pension, more than a handful of times, he admitted.

Interest rates haven't increased since 2011, when the then ECB chief Jean Claud Trichet notoriously hiked borrowing costs in the depths of the euro crisis, which many experts think worsened an already bad situation.

His successor Mario Draghi reversed the hikes and then kept cutting rates after taking over the top job in Frankfurt in 2012 - massively easing the financial pressure on hundreds of thousands of boom-era Irish borrowers.

Any spike in borrowing costs will raise fears of renewed pressure on households, still loaded down with boom-era debt, and many still in negative equity.

Economist Mr McCoille added that families are now in better shape overall than during the crisis.

Household debt has fallen to 140pc of disposable income, from 210pc as debt has been paid down over the last decade.

"You have to remember that rising interest rates are a sign of a healthy economy.

Read More: Analysis: Banks will be the winners

"Borrowing costs might go up, but so might wages and more people are at work."

"Higher interest rates are good news for the banks," Mr McCoille said.

Cheap trackers have been a drag on bank profits, one reason why other Irish borrowers including householders with standard variable rate mortgages pay the highest interest rates in the eurozone.

Irish Independent

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