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Explainer: What will the ECB rate hike mean for your mortgage?

How will the banks react?

The governing council of the European Central Bank (ECB) has increased rates by 0.75%. As many as 500,000 tracker and variable rate mortgage holders could be affected, depending on what the banks do.

Daragh Cassidy of price comparison website bonkers.ie warns that there will probably be more to come. “After that, it’s likely rates will rise by another 0.5 per cent in December, and they will probably get to 3 per cent or more by the middle of next year,” he says.

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The latest hike will mean that someone on a tracker who has €200,000 remaining on their mortgage over 10 or 15 years will now be paying around €180 extra each month compared to the start of the year. That equates to €2,160 per year.

If rates reach 3 per cent next year, that repayment could rise by close to €300 a month, or a whopping €3,600 per year.

For now all the main banks have held off increasing their variable rates, and only AIB has increased its fixed rates, by just 0.5 per cent. However, according to Cassidy: “That’s unlikely to last.”

So, what does it mean for you? Firstly, as Brokers Ireland director of financial services Rachel McGovern points out, if you have a tracker mortgage, you will be affected “straight away” as these rates are tied to the ECB.

“So, it depends if you can take that increase,” she says. “If you can’t — and many will struggle with the cost of living increasing — you should consider moving to a more secure longer-term fixed rate.

“There might be a five- or a 10-year fixed rate out there that is in or around what you are paying at the moment.

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“What I would say though is that a lot of lenders are moving to increase other rates as well, so unfortunately they are all kind of reacting to the last few increases from the ECB. Even though they don’t have to pass that on to the consumer, they are doing so.”

Brendan Burgess, founder of consumer website askaboutmoney.com, says anyone paying a margin of under 1 per cent should probably stick with their tracker.

However, he says the Irish mortgage market is “so dysfunctional” at the moment that anyone on a variable rate should move to a fixed rate.

“Fixed rates are much lower than variable rates,” he says. “It should be the other way around, but it’s not. So anybody who is still on a variable rate should fix their mortgage rate. About five years seems to be where the best value is.

“The exception to that would be someone who is looking to trade up in about two years’ time or in the near future. They might fix for a shorter period because they don’t want to be facing a break fee.

“If you have a fixed rate that expires in February, the break fee will be quite low, so those people should break out of the fixed rate and fix again for five years. That’s very important.”

While Burgess does not believe it is a certainty that rate hikes will be passed on to consumers, Marian Finnegan, managing director of Sherry FitzGerald’s residential and advisory division, points out there have been moves in that direction in the recent past.

“The position for those on fixed and variable rates will vary somewhat,” she says. “The pillar banks did absorb the first ECB increase on their fixed and variable rate products. However, the September increase did result in rate increases.

“AIB increased all their fixed rates for new mortgage customers by 0.5 per cent, while the other pillar banks are expected to increase their rates in the coming weeks. The nonbank lenders increased some of their product rates before the first ECB increase in July.

“Following the September increase some announced tighter restrictions on their lending until financial markets normalise, as well as increasing their variable rates, while others increased their variable and fixed rates by between 1.5 per cent and 2 per cent.”

However, she concludes on a more positive note: “Despite the upward movement, potential purchasers of property can still lock into very attractive long-term rates for two, three, five, or 10 years which offer complete certainty and stability in terms of affordability.”