Mortgage rates will rise from next week

Mortgage and deposit interest rates will increase from next week with AIB and Northern Rock leading the pack in passing on the 0.5 of a percentage point increase in European Central Bank rates.

AIB, which did not pass on the last 0.25 of a percentage point rise in European rates last April, is increasing its variable mortgage rate by 0.7 of a percentage point to 4.99 per cent. Savers will also earn a higher rate of interest on their funds with the bank increasing deposit rates by between 0.5 and 0.7 of a percentage point.

Loan rates are being raised by 0.75 of a percentage point with the exception of personal loan rates which will increase by 0.5 of a percentage point. The new rates will apply from Tuesday.

The 0.7 of a percentage point increase reflects the 0.25 of a percentage point rise in ECB rates in April and the 0.5 of a percentage point increase this week to 4.25 per cent.

Meanwhile, the UK-based Northern Rock which operates a direct savings account for Irish customers has also announced a 0.5 of a percentage point increase in deposit rates. Its demand deposit account rate rises to 5.25 per cent from July 3rd. This rate of interest applies to all direct deposit accounts with funds of more than £1,000 up to a maximum of £2 million. Northern Rock guarantees to pay at least one percentage point above ECB rates until 2001 and then to at least match it until January 2002.

The other main banks and building societies are expected to follow AIB with similar rate increases next week. Financial institutions were continuing to monitor interest rates yesterday with most signalling an imminent rate rise.

Mortgage holders can expect their monthly repayments to rise from next month. AIB customers with a mortgage of £50,000 will incur monthly repayment increases of £18.50 to £329 following the rate rise.

The monthly repayments on a £75,000 mortgage will go up by £27.75 to £493.50, while for a £100,000 mortgage the repayments will rise by £37 to £658.

Some commentators suggest that while the 0.5 of a percentage point increase in ECB rates was bigger-than-expected further rate increases could be on the cards in the months ahead. Interest rates reached a low of 3.99 per cent last autumn.

The latest increase is expected to be the last one until the autumn with signs that further increases are likely towards the end of the year. The Government will be hoping the rate increases will help to cool the housing market, with some suggestions that official figures will shortly begin to record a slight drop in house prices in Dublin.

Higher interest rates will however feed into inflation, which is heavily influenced by mortgage costs.

The Republic is more susceptible to inflationary pressures from higher interest rates than other EU states because of the numbers of borrowers on variable rates compared with the European norm of fixed-rate loans for 10 or 20 years.