Rates may fall by end of summer

Mortgage-holders will have watched with interest last week as the European Central Bank (ECB) governing council met in Dublin. No interest rate cut was forthcoming then, but most commentators agree that there'll be some movement by the end of the summer.

The good news for borrowers in the short term is that the trend downwards is continuing. The ECB's concern is with keeping long-term inflation in the zero to 2 per cent range - which is easier said than done. The euro zone average is currently 3.4 per cent, putting the prospect of rate cuts on the back burner for the moment.

However, clear signs that some larger EU economies are slowing down suggest that cuts are around the corner. Even the most cautious analysts are anticipating aggregate cuts of 0.5 per cent in the ECB base rate by the end of the year.

So where does all this leave Irish mortgage-holders? Lenders passed on a 0.25 per cent cut last month, leading to an average saving of about £14 (17.78) per month on a £100,000 (126,970) mortgage over 20 years. Variable rate borrowers can expect more of the same in the coming months.

In the first quarter of this year, fixed rates were reduced by all lenders and they are now unlikely to fall in the short term.

Mr David Gantly, group treasurer with Irish Life &Permanent, has observed that new borrowers are opting for one-year fixed discounted rates.

His advice to existing variable rate borrowers is to stick with variable for the moment. He said there would be attractive opportunities for people to lock in for fixed terms following the next round of rate cuts.

An AIB spokesman agreed that variable was still a good decision to make for the summer. He recommended that customers compare their variable rate to what's on offer for two- or three-year fixed terms, on an ongoing basis. Customers who opt for fixed rates generally commit to terms of less than five years.

According to Mr Pat Farrell of the EBS, the majority of borrowers are on a variable rate at the moment - in contrast with other European mortgage-holders who tend to prefer long fixed-rate terms. He pointed out that new borrowers have the option to split their loans between fixed and variable.

Irish Nationwide is currently advising customers to stick to variable rate options. The building society also predicts that interest rates will probably fall by 0.5 per cent by September and mentions that people should consider fixing their rates after that point

Overall, things are looking good for borrowers, since the euro has brought a certain stability to interest rates. There may appear to be some remaining volatility in interest rate levels but it is within a much narrower spectrum.

The main thing to keep an eye on between now and September is inflation. Most analysts believe that the euro zone average has to drop below 3 per cent before the next cut, although downward moves from the US Federal Reserve would also have a big impact.

A good tip for variable rate borrowers who can do without the modest savings of a small rate cut is to maintain their repayment at the same level after a reduction.

This can be set up by making a simple phone call to your mortgage provider and can significantly reduce the amount of interest paid and the term of the loan.