ECB tightens squeeze on mortgage holders with further 0.25% rate hike

The European Central Bank (ECB) raised interest rates by further quarter of a percentage point on Thursday, placing additional financial strain on mortgage holders, particularly the State’s 250,000 tracker customers who will face an automatic increase in their monthly repayments.

The ECB’s latest rate increase, the eighth since last July, also came with a warning that the bank’s unprecedented ramping up of interest rates is not over yet and that headline inflation across the euro zone is now likely to stay above the ECB’s 2 per cent target rate until at least the end of 2025, longer than previously anticipated.

The 0.25 per cent increase is being viewed by markets as the penultimate increase in the current sequence with a further quarter point bump expected next month. It lifts the bank’s main refinancing rate, the one that affects mortgages, from 3.75 per cent to 4 per cent.

Investors now see the ECB’s terminal rate – the highest interest rates will go to – settling at about 4.25 per cent, indicating that at least one more hike is fully priced in, but some analysts see the ECB going to 4.5 per cent before pausing its current phase of monetary tightening.

Mortgage rates hit highest level since August 2017

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[ Analysis: Inflation battle still in play so more rate rises on the way ]

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The latest increase will heap more pressure on tens of thousands of mortgage holders who have seen their monthly repayments go through the roof since this time last year. It brings the ECB rate to the highest level in more than two decades, with borrowing costs reaching a level not seen since 2001.

The monthly repayments for a person with a tracker mortgage of €200,000 on a margin of 1 per cent above the ECB rate and a 20-year repayment period will climb by around €37 to €1,329 from next month, according to independent calculations.

That is €420 more each month than before rate rises began, an annual total of just over €5,000 a year. That is an after-tax figure which means many mortgage holders will need to earn around €10,000 just to plug the financial hole caused by eight successive rate increases.

It is not just tracker mortgage holders who are going to pay the price for the monetary policy decisions taken by the ECB although they will be hit first.

As much as €12 billion worth of mortgages will be coming off low fixed rates over the next three years and into a much higher rate environment.

First-time buyers and switchers, meanwhile, have seen the most attractive deals disappearing. Just over a year ago, fixed rates of less than 2 per cent were available to Irish borrowers but the lowest rates on the market now are well over 3 per cent.

[ ECB hikes must not push people into mortgage arrears, Michael McGrath tells top bankers ]

That means that many people who are currently in the process of buying their first home will have to pay almost €3,500 more each year for comparatively modest loans when compared with those who bought this time last year because of successive ECB interest rate increases.

This time last year four-year fixed rates were available to first-time buyers from the State’s pillar banks at rates of between 2.2 per cent and 2.35 per cent but the rates currently being offered to many first-time buyers from AIB, Bank of Ireland and Permanent TSB range from 3.7 to 4.25 per cent.

[ Irish banks could push mortgage rates ‘significantly higher’ if needed – Goodbody ]

With four furtherECB monetary policy meetings set to take place before the end of the year attention is likely to turn to what happens in the weeks ahead.

Last week the Governor of the Central Bank, Gabriel Makhlouf, suggested that another rate hike in July was “probable” although much will depend on what happens with inflation.

The latest decision was underpinned by fresh quarterly projections suggesting inflation will moderate more slowly than previously envisaged, to 2.2 per cent in 2025.

It also raised its 2023 and 2024 projections for inflation excluding volatile energy and food, which is monitored closely by policymakers, on the back of “past upward surprises and the implications of the robust labour market for the speed of disinflation”.