What do the ECB interest rate hikes mean to you?

Mark Coan – Financial expert and founder of the online financial guide moneysherpa.ie

The ECB announced a rate hike of 0.75% today, with ECB interest rates expected to rise by 1.8% by next year, raising the average monthly mortgage payment by €157.

The European Central Bank (ECB) base rate drives mortgage interest rates from lenders, when it rises, so do mortgage rates. The latest ECB survey of professional forecasters predicts the ECB base rate will rise from 0.5% to 1.8% over the next 18 months, the highest rates in more than a decade.

Does this mean mortgage interest rates will go up and what does this mean for you?

In a word, yes, mortgage rates will go up, and the impact on your monthly payments is likely to be important.

A rate hike of 1.8% will increase monthly repayments by €184 per month on the average variable mortgage of €200,000 with a term of 15 years.

Don’t panic though, by fixing your mortgage interest rates you can still limit these increases – and for some, even reduce monthly repayments.

ECB rate hike

The ECB announced a rate hike of 0.75% today, with ECB interest rates expected to rise by 1.8% by next year, raising the average monthly mortgage payment by €157. But what does this mean for you? Photo: Raimund Linke/Getty Images

The latest ECB survey of professional forecasters came out this summer. The survey uses forecast data from financial experts across Europe to predict the likely direction of interest rates.

The average forecast is that ECB rates will rise from 0.5% to 1.8% over the next 18 months. This seems quite realistic with UK interest rates already above 1% and US rates above 2% and rising.

Some of the European experts interviewed, however, see rates rising towards 3% as the ECB struggles to rein in inflation. However, it’s worth remembering that in the 90s interest rates were over 10%, no one really knows how high they might go this time around.

What ECB increases mean for: Tracker mortgage holders

Interest rate
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If you are one of the 300,000 tracker mortgage holders in Ireland, these mortgage rate increases will be passed directly on to you. A tracker mortgage “follows” the ECB base rate and is between 0.5% above the base rate and 2.25%.

If ECB interest rates rise to 1.8%, tracker mortgages will rise similarly:

  • 0.5% tracking = 0.5% + 1.8% = 2.3%
  • Average monthly increase = €161
  • 2.25% tracking = 2.25% + 1.8% = 4.05%
  • Average monthly increase = 174 €

If ECB rates go to 3%, then:

  • 0.5% tracking = 0.5% + 3.0% = 3.5%
  • Average monthly increase = 276 €
  • 2.25% tracking = 2.25% + 3.0% = 5.25%
  • Average monthly increase = 298 €

What ECB increases mean for: Open-end mortgage holders

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The 175,000 holders of variable rate mortgages were granted a temporary stay of execution in July when Irish lenders delayed passing on ECB rate hikes to customers. This is very unlikely to happen with future increases in mortgage interest rates.

The average variable mortgage rate in Ireland is 3.6% according to the latest data available from the Central Bank of Ireland [1] a much higher mortgage interest rate than for tracker customers.

If the ECB interest rate rises to 1.8%:

  • Variable mortgage rate of 3.6% = 3.6% + 1.8% = 5.4%
  • Average monthly increase = 184 €

Or if the rate goes to 3%:

  • Variable mortgage rate of 3.6% = 3.6% + 3% = 6.6
  • Average monthly increase = 314 €

What ECB increases mean for: Fixed mortgage holders

The other 235,000 mortgage holders benefit from fixed mortgage interest rates, meaning lenders cannot pass ECB rate increases on to those customers. Yet these customers should not rest easy either.

The average duration of fixed rate mortgage transactions in Ireland is less than 3 years. This means that many of these customers will break out of their fixed periods to hit the highest rates in a decade.

The average fixed mortgage interest rate is currently around 2.5%:

  • 1.8% ECB increase = 2.5% will change to 5.4% variable
  • Average monthly increase = 290 €
  • 3% ECB increase = 2.5% will change to 6.6% variable
  • Average monthly increase = 420 €

Many of these customers believe they will be able to re-price around 2.5% when they exit their current fixed mortgage interest rate offerings. This is unlikely, because as ECB rates rise, fixed transaction costs for lenders also rise.

The most likely scenario is that the New fixed rate mortgage rates available in 18 months will increase by a similar amount to the ECB rate increases as well:

  • 1.8% ECB hike = 4.3% fixed mortgage rates
  • Average monthly increase = 176 €
  • 3% ECB rate hike = 5.5% fixed mortgage rates
  • Average monthly increase = 301 €

The good news, however, is that the 710,000 mortgage holders can act now to protect themselves from these increases.

Calculating your interest rate increase

ECB
Photo: Witthaya Prasongsin/Getty Images

All of the repayment calculations above are based on an average mortgage outstanding of $200,000, but what does rising mortgage interest rates mean for your own mortgage?

We built a handy ECB interest rate hike calculator so you can see exactly what the mortgage rates mean for you on our website moneysherpa.ie.

Your actual increase will vary slightly from the calculator depending on your current mortgage interest rates.

What can you do to dodge hikes?

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Without action, more than 710,000 mortgage holders face an average monthly increase ranging from around €180 to over €300 depending on where ECB rates actually land.

If you act now by fixing your mortgage rate for 5 years or more, you can avoid increases altogether.

You have two options:

  1. Secure with your current lender
  2. Switch to a new lender and correct

If you’re still within your fixed period, you may think you’ll have to pay “severance pay” to break your existing agreement. In fact, due to recent EU legislation, this is unlikely to be the case, so call your bank to check immediately.

Almost anyone can repair or change without penalty.

The best rates are with “non-bank lenders” Avant Money and Finance Ireland, which are over 1% cheaper than Bank of Ireland or Permanent TSB, so if you want the lowest refunds possible, this is the way to go. to be continued.

This means switching lenders for the vast majority of people.

Keep in mind, however, that if you switch lenders, you will need to invest around €1,500 to cover your expert and attorney fees, unless you switch to Haven who will give you €2,000 to cover them.

In a word

So if you have a mortgage and don’t act now, you could be looking at a $180-$300 hole in your monthly finances by this time next year.

That said, you still have options to completely dodge these mortgage interest rate hikes — You should be looking to fix in the next few months.

Call your current lender and confirm there are no termination fees, then contact a broker and see if you need to switch lenders or settle with your current lender.

Make sure the broker has all the lenders on board, in order to get the best deal.

Next steps

You can learn more about change your mortgage here, how to get out of your current fixed mortgage here, how to fix your mortgage here and fixing your tracker mortgage here.


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