Mortgage rates diverge from European Central Bank rates

Irish mortgage rates have been rising and diverging from ECB rates over the past year, while the average mortgage in the euro zone has become cheaper, the latest data from the Central Bank shows. The Central Bank's retail interest rate statistics for March, which do not reflect the most recent ECB rate cut, also indicate that the returns on offer for Irish deposit-holders are diminishing by the month.

The Central Bank found that the average Irish mortgage rate has been moving out of sync with the key ECB rate over the nine months to March – it has risen by 0.14 percentage points to 3 per cent, while the ECB rate was steady at 0.75 per cent. Over the same period, the average equivalent euro-area mortgage rate declined by 0.23 percentage points to 3.49 per cent.

Variable-rate mortgages
The divergence reflects the higher cost of variable-rate mortgages issued in Ireland since the start of the financial crisis, as lenders have moved away from their traditional policy of tracking or at least moving in sync with ECB rates. Trackers, which guarantee to move within a fixed margin of ECB rates, dominated new mortgage issuances during the economic boom but are no longer available to new borrowers, while lenders have more recently tended not to pass on ECB rate cuts to their variable customers.

AIB standard variable customers have, for example, absorbed a rise of 1.4 percentage points in their interest rate since the start of 2012, while the ECB has cut its main rate four times in the past year and a half.

The average mortgage rate on outstanding Irish mortgages was fairly stable at 2.96 per cent over the year to the end of March, while the average euro-area mortgage rate fell by 0.36 percentage points to 3.49 per cent.

For new Irish mortgages issued in March this year, both variable and fixed for up to one year, the average rate was 3.16 per cent, down 0.02 percentage points on the previous month. The corresponding March average rate in the euro zone was 2.86 per cent, although just 27 per cent of new mortgage business in the euro area in March fell into this variable or short-fix category, compared to 84 per cent in the Republic.

Banks recouping costs
The Central Bank figures prove that banks are seeking to recoup costs on the deposit side too, with the average interest rate on outstanding Irish household term deposits falling from 3.06 at the end of February to 2.98 per cent at the end of March. This was the 11th consecutive monthly decline. New term deposit accounts opened during March carried an average rate of 1.19 per cent, down from 1.26 per cent a month earlier.

The data also show that average business loan costs for Irish customers mostly rose in March, again contrary to wider euro zone trends, while Irish business deposit rates fell.