The announcement on Friday by AIB that it was increasing its fixed interest rates for new lending is a further sign that borrowers are only starting to feel the impact of higher ECB rates. There is no doubt that other banks will follow, leading to higher costs for mortgage holders, albeit that for many the pain may be delayed for some time as they are currently on fixed rate agreements.
Irish banks have been relatively slow in general to follow the ECB lead, meaning the cost of new loans taken out by borrowers has continued to fall up to recently. This will now change – and quickly. Those on tracker interest rates have already seen an immediate follow through in their costs, and the cost of other variable rate loans will follow.
For many – particularly those with older loans – higher mortgage costs will be unwelcome, but not a major problem. However some borrowers will be hit hard. These include those on lower incomes, hit by the combined impact of a cost-of-living crisis and higher repayments. Also, newer borrowers currently on fixed rates will find they have to refinance at much higher rates when their fixed term runs out. This will be a major factor in the market in the years ahead.
Mortgage rates have also risen sharply for those who had their loans sold by major banks to investment funds, and now see them managed by service companies such as Pepper, which last week announced a rise in its variable rate to over 6 per cent. As many of these borrowers previously faced repayment difficulties, at least some will now be financially exposed.
There is little point blaming the banks for pushing up mortgage rates, given the scale of ECB increases. However two points should be made. Mortgages here have been amongst the most expensive in the EU – this should give banks leeway to hold off passing on all the ECB increases. The recent move down the EU borrowing league is welcome. Second, higher rates for borrowers must mean better return for savers, too. There is no excuse for banks using the turn in the interest rate cycle to boost their profit margins.