Banks not to pass on ECB interest rate cut to variable mortgage holders

Gulf in rates with tracker mortgages now up to 3%

European Central Bank president Mario Draghi at the Spring Meeting of the International Monetary Fund and World Bank in Washington last month. The Irish Small and Medium Enterprises Association has called on the Government to take the “strongest action possible” to force banks to pass yesterday’s ECB interest rate  reduction.    Photograph: Yuri Gripas/Reuters

European Central Bank president Mario Draghi at the Spring Meeting of the International Monetary Fund and World Bank in Washington last month. The Irish Small and Medium Enterprises Association has called on the Government to take the “strongest action possible” to force banks to pass yesterday’s ECB interest rate reduction. Photograph: Yuri Gripas/Reuters

Fri, May 3, 2013, 10:23

About 400,000 homeowners on tracker mortgages will benefit from the 0.25 per cent interest rate cut announced by the European Central Bank yesterday but none of the State’s main banks have plans to pass the rate cut on to variable rate customers.

A similar number of homeowners have such mortgages and the gulf in interest rates between them and those on trackers is now as high as 3 per cent – a gap which will see a person with a €300,000 variable rate mortgage paying more than €500 a month more on loan repayments than someone with a tracker of the same size.

Record low
In a widely anticipated move, the ECB cut its main interest rates by a quarter of a percentage point to 0.5 per cent, a record low. While the rate cut was aimed at providing a shot in the arm for the European economy it will also reduce mortgage repayments for hundreds of thousands of Irish people with tracker mortgages tied to the Central Bank’s rates.

For every quarter of a point the ECB lowers its rates, the monthly cost of servicing a €100,000 tracker mortgage falls by about €15 so the average tracker mortgage holder with an outstanding loan of €300,000 will see monthly savings of €45 from the beginning of next month.

Rate reduction
As a result of the move – the fourth such rate reduction in the last 18 months – a person with a €300,000 tracker mortgage is now paying about €180 a month less than in the autumn of 2011, which amounts to a total annual saving of more than €2,100.

While the cut will be automatically passed on to tracker mortgage holders, people with variable rate mortgages are at the mercy of individual banks and with banks pushing variable rate mortgages up irrespective of the course of action being followed by the ECB, the possibility of rate cuts being rolled out across the board seems remote.

‘Variable rates’
Rachel Doyle of the Professional Insurance Brokers Association said that while the announcement was “very welcome for those on tracker mortgages, the impact will be marginal by comparison with what the Irish banks are attempting to do with variable rates”.

The issue of most concern to Irish consumers now, she added, “is Irish bank interest rates which have been creeping up surreptitiously.

“In recent days under cover of the potential ECB rate cut we have seen AIB and EBS move to increase rates by 0.4 per cent and 0.25 per cent consecutively, which comes into effect from the beginning of June.”

The Irish Small and Medium Enterprises Association called on the Government to take the “strongest action possible” to force banks to pass on the reduction.

Asked whether Minister for Finance Michael Noonan had any comment on whether banks should pass on the rate cut to standard variable rate customers, his spokesman indicated he would not be intervening.

“This is purely a commercial matter for the banks,” the spokesman said.

AIB, EBS, Permanent TSB and Danske Bank said that while they kept rates under review they had no plans to lower them. Ulster Bank was unavailable for comment.

The ECB also signalled yesterday that further interest rate cuts could be on the cards.

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