What does the ECB's rate hike mean for consumers?

Prices are rising – Is it too late to fix?

The European Central Bank certainly took its time to act.

While its counterparts in other jurisdictions have been raising rates for months, the ECB held back and surveyed the landscape.

The bank gave plenty of advance notice of its intention to start raising rates this month, but when they finally got around to it, they surprised many with a huge rate hike of half a percent – double what they had signaled to the markets.

There is an expectation that more rate hikes will follow. The ECB appears intent on bringing inflation back to its 2% target and is making that its primary objective right now.

So, now that they’ve started down the road to higher interest rates, have mortgage holders missed the boat or can they still lock into a fixed rate?

No radical changes – yet!

While at least one bank – Permanent TSB – had indicated it would absorb the first rate rise for variable rate mortgage holders, they may have been expected to back off that promise in light of the bigger-than-expected 0.5% rate hike from the ECB.

Ultimately, it kept its floating rate unchanged.

Bank of Ireland did the same. AIB confirmed earlier this week that it will also keep its floating rate unchanged.

Of the three, AIB has the lowest variable rate, which at 3.15% is matched by Finance Ireland and Haven. ICS Mortgages has a floating rate offer of under 3%.

While there are better rates to be found in the fixed market, the floating rate products offer some flexibility for those who may need it.

The question is how long they stay like that and how far they can go.

With the ECB likely to continue raising interest rates, the estimated 175,000 property owners on variable rate mortgages here are sure to be in line for higher monthly repayments.

Increasing popularity of fixed interest rates

Bank of Ireland has for many years made a virtue of switching its customers to fixed-rate mortgages.

In 2016, the bank’s then chief executive Richie Boucher told the Oireachtas Finance Committee that the lender was “deliberately encouraging customers to move to fixed rates”.

Part of that process was to pitch their floating rate offering at a level deliberately unattractive to customers compared to its fixed rates.

The move to fix, Boucher argued, gave customers and the bank more certainty.

Indeed, consumers seem to have responded to that move. Those looking to secure their first mortgage – as well as those who already have mortgages – are switching to fixed rates with greater frequency, especially in the last six months or so.

Part of that has been driven by increased competition in the market in recent years, particularly the emergence of so-called non-bank lenders in the market.

Part of that is due to borrowers deciding to switch lenders as two banks exit the market here, but much of the recent activity has undoubtedly been fueled by the trend towards higher interest rates globally.

We already have among the highest interest rates in Europe here. Consumers are increasingly aware of that and don’t want to pay more than they have to, especially at a time when rising living costs are putting pressure on the economy.

Increase in fixation

Data published by the Banking and Payments Federation of Ireland this week pointed to a particularly buoyant mortgage market here between April and the end of June with €3.1 billion in mortgages – up more than 40% on the same time last year.

That reflects the ever-increasing size of the average mortgage taken out as well as continued momentum in the housing market in the aftermath of the pandemic – not to mention pent-up demand for mortgages from those looking to get into the housing market.

But it also reflects the increase in activity of households choosing to refinance or top up their loans with an 80% increase in the value of mortgages in this category to €740m over the three months.

“Undoubtedly, a lot of this was driven by households wanting to hedge against the ECB’s rate hikes,” said Conall MacCoille, chief economist at stockbroker Davy.

Joey Sheahan, head of credit at online broker MyMortgages.ie and author of Mortgage Coach, said that was certainly the case from his experience.

He said swap activity had been busy in the year to date and he expected a “storm of activity” in the coming months.

“Fixed rates dominate the mortgage market,” he said.

Have fixed interest rates already gone up?

The pricing of fixed rate products tends to reflect the price of mutual funds in the money markets.

It has risen steadily in recent months, reflected in bond markets with yields on government and corporate debt rising sharply – albeit to levels still considered low by historical standards.

However, very few mortgage lenders have followed through with increases to their fixed rate products.

Only ICS Mortgages, Finance Ireland and Avant have increased their fixed rates – by a fairly modest margin – reflecting the higher cost of funds, but they still have among the most attractive rates on the market.

The bank lenders have left pricing largely unchanged, mainly because their funding consists largely of deposits from individuals, which are plentiful right now.

“These pricing trends are unlikely to continue as interest rates rise, although individual lenders are likely to move over different timeframes as dynamics differ in terms of pricing approaches in the market,” Davy Financial Analysts Diarmaid Sheridan and Antonio Duarte said in a research note .

They believe remortgage levels are likely to remain high in the coming months but will return to more “normalized” levels as pricing adjusts.

So, I haven’t missed the boat?

There are plenty of options to fix at attractive prices over periods from one to thirty years.

Deciding at what point to fix depends on the borrower’s level of risk appetite.

Avant currently offers a 30-year fixed option with interest from 2.5% and Finance Ireland offers terms of up to 25 years.

“They provide a strong level of certainty, particularly for those who want the convenience of knowing what their future financial expenditure will be,” said Rachel McGovern, Director of Financial Services with Brokers Ireland.

And in the current rate hike cycle, it may well prove to be a valuable future-proofing tool.

However, in the context of the precarious growth scenario facing the Eurozone right now, the ECB may not choose to raise interest rates as far as its counterparts.

Indeed, some have speculated that rate cuts could be on the way again if a severe recession results from the negative performance in the energy sector.

After all, the last time the ECB raised rates in 2011, it had to reverse the hike within months as a debt crisis threatening the euro took hold.

However, the fact is that no one knows which way interest rates are likely to go.

ECB President Christine Lagarde virtually admitted last week with her declaration that the bank would make its monetary policy decisions “month by month, step by step” and that it would be “data dependent”, essentially abandoning policy “future guidance”.

Rachel McGovern said that history had believed that we should not speculate on interest rate movements.

“Ten years ago, hardly anyone believed or predicted that the ECB interest rate would drop to zero as it did in 2016 or that it would stay at this level until now,” she pointed out.

She said fixed rates at least offered property owners the certainty of knowing what their expenses would be over a certain period.

“There are still very good long-term fixed rates on the market, which means people can plan their financial affairs knowing what their financial expenses will be in the longer term. And these will suit some tracker loan holders, those on higher tracker rates,” added she.

So, should I give up my tracker then?

“Trackers are gold” is a refrain many of us would have heard over the last decade or so and the overwhelming advice was to guard them closely.

But in connection with the changing interest rate environment, the question has arisen whether the shine has come off gold and whether it might be time to consider dropping the tracker?

Again, it depends on risk appetite and how far interest rates go in the current interest rate cycle.

Brendan Burgess, founder of financial website askaboutmoney.com said it was largely dependent on what interest rate a mortgage holder pays over and above the ECB rate, which dictates tracker pricing.

“If they have a cheap tracker, say a 0.5% margin over the ECB, with 20 years to run, they probably shouldn’t fix,” he said as a general rule of thumb.

“But if they have an expensive tracker, like ECB + 2%, then they should probably fix.”

All banks will automatically pass on the 0.5% rate rise to their tracker mortgage customers over the coming weeks.

They will write to affected mortgage holders.

It’s a correspondence that some may get quite used to in the coming months and years.

But then a lot of it depends on the way forward for the economy.

After a period of remarkably loose and stable monetary policy, the interest rate landscape is changing.


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