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Bonus cut for tracker mortgage holders due this autumn from ECB revamp

Bank looks likely to cut rates three or four times this year

Irish tracker mortgage holders look set to get a bonus reduction of 0.35 of a percentage point in the interest rate on their loans this autumn, due to a rethink by the European Central Bank (ECB) of the gap between its different policy rates. Photograph: iStock

Cliff Taylor
Thu Mar 14 2024 - 13:07

Irish tracker mortgage holders look set to get a bonus reduction of 0.35 of a percentage point in the interest rate on their loans this autumn, due to a rethink by the European Central Bank (ECB) of the gap between its different policy rates.

The ECB sees its main interest rate as being the deposit rate, which it pays to banks on deposits it holds for them. This rate is currently at 4 per cent and is expected to be cut as the year goes on.

However, tracker mortgage rates are priced off another ECB interest rate, the refinancing rate, which has recently been half a point higher and now stands at 4.5 per cent. This means that currently, the interest rates on tracker loans are typically in the 5.6 per cent to 6 per cent range. There are 180,000 tracker mortgage holders in the State.

However in a review of what it calls its operational framework, the ECB has announced that it will cut the gap between the deposit rate and the refinancing rate from 0.5 of a percentage point now to 0.15 of a point “as of September 2024″. Given that the ECB has reaffirmed that the deposit rate will remain the key interest rate for the bank, this means that the refinancing rate will drop closer to the deposit rate on that date.

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This means a repayment reduction for most tracker holders as contract terms generally say that their borrowing rates vary automatically with the refinancing rate.

Economist Simon Barry says that the ECB is not breaking new ground by varying the gap between its various interest rates, as it has done so in the past as economic conditions have varied.

[ Average interest rate on new Irish mortgages creeps higher ]

Tracker holders benefited in the run-up to the financial crash as the gap narrowed, though it widened a bit in the meantime. They now look set to gain again, he said, as the ECB adjusts its policy stance.

Tracker mortgage holders, who have suffered the largest increases from the rise in ECB rates since mid-2022, are in line to be the first to gain as interest rates fall generally, as their contracts are tied directly to ECB moves.

The first reduction in ECB rates is expected in the months ahead, probably in June. The reduction in the gap between the two key ECB rates promises an additional reduction for these mortgage holders in the autumn.

On its own, the reduction in their repayments is likely to be in the €15 to 20 a month range on a €100,000 loan, due to the 0.35 of a point fall. However, the total fall in repayments will be well ahead of this as speculation grows that the ECB will cut rates, perhaps three or four times, later this year.

Tracker rates could be one percentage point lower this winter than they are now, a saving of around €60 a month on a typical tracker with €100,000 left on their mortgage and with the addition of the “bonus” cut gains could even be ahead of this.

Cliff Taylor

Cliff Taylor

Cliff Taylor is an Irish Times writer and Managing Editor

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