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Dan White: Families now facing €3,900 a year extra on their mortgage

News that most of the major lenders are putting up their mortgage rates is the latest in a series of hikes which will see most homeowners paying up to 2pc more. With the banks desperately seeking to boost their margins homeowners can expect further rate increases in the months ahead.

Most of the Irish-owned banks including AIB, Bank of Ireland, Permanent TSB and Irish Nationwide, are expected to increase their mortgage interest rates by around 0.5pc before the end of August.



Plans

The other Irish-owned lender, EBS, has already announced that it plans to increase its mortgage rate by 0.6pc.

For anyone on a standard variable rate mortgage the latest interest rate increases will take yet another chunk out of their after-tax incomes. For a family on a €300,000, 25-year, variable rate mortgage the latest increase will add a further €80 to their monthly repayments which will rise from €1,454 to €1,534.

And the bad news is that there is almost certainly even more to come. Most of the Irish banks now finance up to half of all their loans, not from good old-fashioned retail deposits, but from so-called wholesale funding, ie, they have borrowed the money from overseas banks on the international inter-bank markets.

Way back in the middle of the last decade when the Irish economy was booming and house prices were soaring, this probably seemed like a good idea. Now that the Celtic Tiger has been transformed into a mangy moggy it doesn't seem so smart any more.

With all of the Irish banks completely dependent on state support for their very existence, it turns out that all of those foreign banks who were falling over themselves to lend to us have now become much more cautious. In practice they will now only lend to the Irish banks with a state guarantee, and at much higher interest rates.

Now that NAMA is up and running the Irish banks are now passing on these higher interest rates to their customers.

It doesn't help other borrowers that several hundred thousand homeowners are tied into tracker mortgages, which charge a fixed margin over ECB interest rates. The banks are now losing a fortune on these tracker mortgages.

So by how much more will mortgage interest rates rise and how much will it cost homeowners with variable rate mortgages?



HIKE

Look at what has happened at Permanent TSB. The bank has already put up its mortgage rates by 1.5pc. The latest round of increases will bring the total hike for Permanent TSB customers to 2pc. AIB and Bank of Ireland have already increased their variable mortgage interest rate by 0.5pc earlier this year.

While the current round of increases will mean that most of the other Irish-owned banks will have increased their mortgage rates by a cumulative 1pc, it's only a matter of time before they too follow suit and push up their variable mortgage interest rates by a full 2pc.

So when is this going to happen and how much will it cost homeowners?

When variable rate mortgages bottomed out last year most homeowners were paying an interest rate of about 2.7pc. At that rate a 25-year, €300,000 mortgage would have cost about €1,376 per month.

The rate increases earlier this year would have pushed this up by about €78 per month to €1,454 per month while the increases to be announced shortly will push it up by a further €80 to €1,534.

But there is even worse to come. When the other banks follow Permanent TSB's example, which is likely to be very soon, and increase their rates by a full 2pc the monthly repayments will shoot up by a further €167 to €1,701 per month.

That will bring the total increase since mortgage rates started rising to a massive €325 -- or €3,900 per year.

For most families, dearer mortgages will take a larger chunk out of their shrivelled incomes than the taxman.


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