Many borrowers on variable rates will have been receiving letters over the last couple of months informing them that their repayments are on the way up.
The European Central Bank has raised interest rates every month for the last three months and more are certainly on the way. Colin Hunt, chief economist at Goodbody Stockbrokers, believes that rates could go up by a half percentage point in May.
Borrowers who were on variable rates of around 3.9 per cent only last November are now going to be paying over 5 per cent. And by the end of the year that is likely to be around 6 per cent as the ECB continues to hike rates.
At the moment the official interbank rate in the euro zone is some 3.75 per cent, having been as low as 2.5 per cent. Most analysts are agreed that it is heading towards 5 per cent this year and could well go further next year. Some are even talking about interest rates coming close to 6 per cent by the end of next year.
Of course much of this is only guess work and it does depend on a lot of factors. Chief among these is of course how quickly countries like France and Germany grow over the coming months and of course how quickly prices start rising. The euro's recent freefall does not help matters. It not only makes imports much more expensive pushing up prices in shops but also boosts the economy.
Of course by Irish historical standards these are not particularly high interest rates. Many people will remember back to the time of the currency crisis when rates briefly touched 15 per cent. That is simply not going to happen any time soon.
But that period of high rates caused huge damage to the economy and to homeowners. This time around rising interest rates could mean trouble for younger people who are very heavily mortgaged.
The banks report that average mortgages are around £75,000 but that hides a lot of people with mortgages of £150,000 to £200,000. One bank said recently that it only considers a loan to be particularly large when it reaches £250,000.
Loans of this size, of course, are far more susceptible to interest rate increases than the more traditional smaller loan. And, in addition, such large initial repayments could well be the most particular borrowers could afford, and there may be very little room for manoeuvre.
For example, in November somebody with a £75,000 loan over 20 years would have been making repayments of some £450 a month. That is now likely to be around £500 and if rates continue to rise it could be as high as £550 if mortgage rates breach 6 per cent. The figures are of course doubled for a £150,000 mortgage where the repayment could possibly go from £900 a month to £1,100. That could make a big difference to a monthly budget.
AS a result many people are likely to be asking if now is the time to fix. A two year fix rate is now available for around 5.5 per cent and a three year can still be found for less than 6 per cent. So if you are worried and do not want to worry about the state of your repayments for the next few years these could be reasonable options. But remember they are priced to make the lenders money and there is very little flexibility after taking out the loan.
Few lenders allow any early repayment of a fixed rate loan. You cannot pay off lump sums and if you want to get out because the money markets do something unexpected (a probability) you may have to pay a fee. But it may still be insurance for peace of mind.
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