Buddy can you spare €800 a month?
How easy would it be for you to find an additional €800 a month just to keep a roof over your head? Most people, already hit by a double whammy of pay cuts and tax increases in recent months, would struggle to cobble together the cash. But with the European Central Bank (ECB) giving its clearest signal yet that a sustained round of interest-rate hikes is looming, more than 500,000 mortgage holders may have no choice but to find it somewhere.
Holders of precious trackers have enjoyed a mortgage honeymoon over the past two years, as the ECB kept rates at a historic low of 1 per cent. The bank’s governor, Jean-Claude Trichet, voiced concern about inflation across the euro zone on Thursday, so it looks as if that honeymoon is about to shudder to a halt. As many as four rate hikes could take place over the next nine months, beginning, in all likelihood, next month.
So what will the increases mean? Typically, the ECB likes to take baby steps, so when it increases rates it will probably increase them by a quarter of a point. For every €100,000 owed on a 30-year tracker mortgage of 1.5 per cent plus the ECB rate, this increase will add €13.12 to the monthly repayments. That may not sound like a lot, but a person with a €400,000 mortgage will need to find a further €52.50 monthly, or €630 each year. And that is just the start. Three more similar increases before Christmas would see those monthly outgoings increase by over €200.
And there is no reason to think the rate increases will stop there. Not much more than two years ago the ECB rate was close to five per cent. Were it to reach such highs again in the months ahead – admittedly, a nightmare scenario – that €400,000 mortgage would cost more than €800 extra a month, or €9,600 a year. And that’s after tax, so a person would need to earn about €20,000 more just to cover the extra payments.
The ECB increases would also affect standard variable rate mortgages, which have already been hit hard by unilateral increases by many of the country’s banks. Last month Permanent TSB announced a 1 per cent increase to its variable rate and temporarily suspended its fixed rates for new customers. It also raised interest rates by between 2 and 3 per cent for existing customers who wanted to renew their fixed-rate mortgages.
EBS also announced a 0.6 per cent increase in its variable rate, from 3.83 per cent to 4.43 per cent, while Ulster Bank increased its variable rate by half a point, from 3.85 per cent to 4.35 per cent, effective from March 1st. KBC Homeloans increased interest rates on some of its variable-rate mortgage products and withdrew some fixed-interest products. It withdrew its five-year fixed-rate mortgages and upped its variable rate for new customers by 0.25 per cent, to 3.55 per cent.
Someone with a €300,000 variable-rate mortgage spread over 30 years at a current rate of 4 per cent would see monthly repayments increase by €43.50 if the ECB upped its rates by a quarter of a point. Were ECB rates to reach the nightmare high of 5 per cent, it would cost the €300,000 mortgage holder more than €700 a month.
With Central Bank figures released at the beginning of this week indicating that at least 5.7 per cent of residential mortgages are in arrears of 90 days or more, the personal debt crisis could get a whole lot worse.