Rate hike of 0.5% at AIB hits 50,000 households

 

ABOUT 50,000 AIB mortgage customers will be hit by a 0.5 per cent rate hike today, as the loss-making bank becomes the latest lender to increase its pricing.

AIB yesterday blamed its rate increase on the difficult funding environment that Irish financial institutions continue to face.

Last week, after the bank reported a €2 billion loss for the first half of the year, AIB’s managing director, Colm Doherty, signalled that the bank was losing money on mortgages and would “reluctantly” have to raise interest rates.

As a result of rate changes announced by the bank yesterday, owner-occupiers with standard variable mortgages will see their interest rate rise from 2.75 per cent to 3.25 per cent.

This half percentage-point increase means repayments will increase by €26.82 a month for every €100,000 borrowed over a 30-year term.

This is the second such increase by AIB this year, and follows similar hikes by Bank of Ireland last week, and Permanent TSB and EBS last month. All four lenders have now increased their interest rates twice since the start of the year.

Mr Doherty indicated last week that unless the European Central Bank (ECB) pushes up interest rates, AIB will not implement any further rate hikes this year.

The ECB rate has remained at a historic low of 1 per cent for 15 consecutive months now, and most economists expect it will remain unchanged until 2011.

Once AIB’s latest rate change comes into effect at the close of business today, customers who repay their mortgage on the bank’s loan-to-value (LTV) variable rates also face a 0.5 per cent increase, and will move onto new rates ranging from 3.09 per cent to 3.49 per cent.

New fixed-rate mortgage contracts will also become more expensive.

Some 30 per cent of AIB’s residential mortgage customers are on variable mortgage rates and will therefore be affected by today’s rate increases.

A further 60 per cent are on tracker mortgages, which move in line with ECB rates, and so will not be hit by the change. The remaining 10 per cent are on fixed rates, and therefore are also insulated from today’s hikes.

Existing buy-to-let customers on tracker, standard variable or fixed rates are unaffected.

However, fixed rates will increase for new business in this category.

AIB’s head of mortgage products, Michael Quirke, said funding availability remains difficult on wholesale money markets.

“Unfortunately, we have little choice but to introduce this pricing change, which is a measured response to the significant challenges which must be overcome if we are to achieve an economic return on our loan book and thereby return to a sustainable business model,” he said.