Homeowners could pay €400 extra a month if interest rates ‘normalised’

Head of Bonkers.ie warns of potential impact if ECB raises rates amid soaring inflation

The "normalisation" of interest rates across Europe could see mortgage holders in Ireland paying up to €400 more a month even on modest mortgages of €250,000, price comparison website Bonkers.ie has warned.

The group's head of communications Daragh Cassidy was speaking as a top European Central Bank (ECB) official hinted that Frankfurt may opt to increase interest rates by half a percentage point as soon as July if inflation continues to climb, the first time such an aggressive shift has been mooted.

Dutch central bank chief Klaas Knot’s comments sent ripples through financial markets, triggering an appreciation in the euro and a decline in euro zone bond prices.

Assessing the implications of such a rate hike, Mr Cassidy said those on tracker mortgages or variable rates could see “an almost instant increase” in their monthly repayments.

“For someone with €200,000 remaining on their tracker mortgage over 20 years – currently paying a margin of 1 per cent – they’re looking at an increase in repayments of around €45 a month if the ECB raises rates by 0.5 per cent,” he said.

“If you’re an average first-time buyer borrowing €250,000 over 30 years at the average rate of 2.78 per cent, a 0.5 per cent increase would add around €70 a month to your repayments if you’re on a variable rate,” he said.

Normal levels

While these sums are not huge, Mr Cassidy warned that if rates were to eventually return to more normal levels – 3 per cent, for example – a €250,000 mortgage would be over €400 more expensive each month while a €500,000 mortgage would be €800 extra per month.

This is based on the average rate in Ireland going from 2.78 per cent at present to 5.78 per cent.

“Having said that, given the huge disparity between mortgage rates in Ireland and the rest of the euro zone at the moment – the average rate in the euro zone is just 1.46 per cent – as well as half-decent competition in the mortgage sector at present, there is potentially room for Irish lenders to absorb a small rate increase,” he said.

With euro-zone inflation at a record high 7.5 per cent, nearly four times the European Central Bank’s 2 per cent target, pressure is growing on Frankfurt to act and several policymakers are already pushing for faster “normalisation”.

ECB chief Christine Lagarde and Central Bank of Ireland governor Gabriel Makhlouf have indicated that a sequence of interest rate increases could begin as early as July.

Rachel McGovern of Brokers Ireland said:“We’ve got used to very low interest rates. From a high of 4.25 per cent in 2008, the ECB dropped its main so-called ‘refinancing rate’ to zero in March 2016 and remaining there ever since.”

“This base rate has been particularly advantageous for tracker mortgage holders. Their repayments contractually mirrors the rate, generally paying a rate between 1 per cent and 3 per cent above the ECB rate, depending on the terms of the particular mortgage contract,” she said.

“While over 240,000 mortgage holders still have such agreements, no new trackers have been issued since 2008. This group will, however, be impacted by a change in ECB policy,” she said.