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WHY WE FACE HIGHER M ORTGAGES EVEN IF THE ECB CUTS IT S RATE

Bank of Ireland's plans to hit homeowners with a 0.5pc interest rate increase shows just how far Irish rates have decoupled from official ECB rates. With Irish banks having to pay more for deposits, Irish borrowers will have to pay more for their loans.

Announcing Bank of Ireland's half-year results, chief executive Richie Boucher had more bad news for homeowners when he revealed that the lender would shortly be passing on this year's two ECB interest rate increases to its customers.

If Bank of Ireland passes on the full 0.5pc ECB rate hike it will cost hard-pressed homeowners €30 for every €100,000 borrowed.



tracker

So why, with the financial turmoil having forced the ECB to postpone plans for any further rate increases for the foreseeable future, is Bank of Ireland proposing to raise its interest rates now?

Well the first thing to bear in mind is that, except for those lucky enough to still have tracker mortgages, Irish interest rates have long since decoupled from official ECB rates.

With depositors and other banks worried about their solvency, the Irish banks have to pay extremely high interest rates in order to persuade individuals and companies to entrust them with their cash.

Bank of Ireland currently pays savers a fixed 12-month interest rate of up to 3.8pc. However, its standard variable mortgage rate is just 3.5pc. This means that Bank of Ireland is paying more for funds than it is charging its mortgage customers.

It's a similar story at AIB which pays savers a fixed 12-month rate of up to 3.95pc but which also has a standard variable mortgage rate of approximately 3.5pc.

There is no way that the two major banks can go on charging their borrowers less than they pay their depositors. And they won't.

Not alone is Bank of Ireland preparing to jack up rates, AIB is also understood to be preparing to hit its customers also.



panic



To get some idea of how high mortgage rates could go one has only to look at mortgage bank Permanent TSB, which now charges its unfortunate variable rate customers between 5.6pc and 6.5pc.

These rate increases will pile even more pressure on homeowners who have already seen their incomes slashed and the value of their homes collapse.

Bank of Ireland revealed that 4.5pc of its mortgage customers were more than 90 days in arrears at the end of June, up from 3.7pc at the end of December 2010.

So is there any good news for homeowners?

With international financial panic having now spread to France it can be taken as read that, far from increasing interest rates even further as it had originally planned, the next major move in ECB interest rates will be down.

This reduction in interest rates could happen as soon as next month if the global financial crisis continues to worse. But will any such ECB rate reduction be passed on to Irish mortgage customers?

That, literally, is the €64bn question.

If the crisis drags on it will become even more difficult for the Irish banks to entice depositors to lodge money with them.

This means that, unless they can persuade the ECB to lend them even more money, they will have to pay more, perhaps a lot more, for deposits. In practice, with the ECB and the Irish Central Bank having already lent the Irish banks a massive €150bn, the chances of either institution lending the Irish banks even more money must be considered extremely remote.



solvency

The banks and their customers are now trapped in a Catch-22 situation.

While the global financial crisis is likely to lead to lower ECB rates, any such crisis will also increase worries about the solvency of the Irish banks meaning that they will have to pay higher rates for deposits, more than wiping out any reduction in official rates.

Until the Irish banks are restored to financial health homeowners can look forward to a future of mortgage rate increases, no matter what the ECB decides.


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