More mortgage pain ahead as rates set to rise further

Christmas has come early for hundreds of thousands of mortgage holders across the country today.

The ECB has delivered a gift, unwanted by most, of a further 0.5% increase in interest rates.

It was expected by analysts and even our own Central Bank Governor, Gabriel Makhlouf, hinted strongly last week that it was coming.

Nonetheless, it will not be welcomed by borrowers, particularly those who are on tracker or variable rates or soon about to roll off a fixed rate.

Particularly when it comes on top of three other increases earlier this year, which collectively have brought the main borrowing rate to 2.5%.

Why is the ECB increasing rates again?

For one reason and one reason only – inflation.

Last month, prices in the eurozone rose at an annual rate of 10%.

That was down slightly on the 10.6% recorded in October.

But it is still too high and five times greater than the ECB's own medium-term target of 2%.

The October reduction came mostly from lower energy price inflation.

The price of food and underlying price pressures across the economy have strengthened and will persist for some time, the ECB believes.

As a result, it has revised upwards its projections.

It now sees average inflation reaching 8.4% in 2022 before decreasing to 6.3% in 2023, and then declining "markedly" over the course of that year.

Inflation is then projected to average 3.4% in 2024 and 2.3% in 2025.

That's not good is it?

Well, it has certainly dashed any hopes of a quick normalisation of inflation rates over the next year.

And it means that the ECB may have to go further for longer when it comes to increasing rates.

"In particular, the Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target," the ECB said in the statement.

ECB President, Christine Lagarde, went further at a press conference this afternoon, saying further 50-basis-point rises should be expected for "a considerable amount of time".

"We will sustain the course - it will not be enough to hit and withdraw," she said.

She also hinted that the market expectations of the end point for this round of interest rate increases, which is currently around 3%, may have to be revised upwards.

The only factor which might influence all this though is the prospect of recession in the eurozone.

The ECB is predicting that the euro area could contract in the current quarter and the next quarter, which could help dampen demand, and in turn the rate at which prices are rising.

But overall it expects any recession will be "relatively short-lived and shallow", so the influence may be minimal.

What does this mean for my mortgage?

For many it will be considered a nightmare before Christmas, although the full effects are unlikely to be felt until the New Year.

Much will depend on the pace at which the banks pass today's and previous increases on to customers.

For those with a tracker mortgage, the rise will unfortunately come straight away, as per contracts.

According to MyMortgages.ie, it will add another €600 a year to the mortgage bills of a homeowner on a 30-year tracker mortgage of €200,000.

In total the 2.5% increase in rates since July will have added €3,000 a year to such a mortgage.

So far, the banks have been slow to pass on rate increases to variable and fixed rate customers.

Oddly, after many years of Ireland having the highest mortgage rates in the eurozone, it now means that we now have the fifth lowest rate across the bloc.

But few are under any illusions that such a situation will prevail for long.

The expectation is that over time, Irish borrowers will eventually be hit with the fully extent of the four rate increases.

"Since July the ECB has raised rates by 2.5 percentage points," said Daragh Cassidy from Bonkers.ie.

"However, AIB has only hiked its fixed rates by 1 percentage point, PTSB has hiked its fixed rates by an average of 0.45 percentage points, and BOI has hiked its fixed rates by just 0.25 percentage points."

"Today's news almost guarantees that all three lenders will hike their fixed rates again in the New Year."

Large numbers of mortgage holders have moved to fixed rates in recent months, to try to head-off the oncoming rate onslaught.

They will largely be insulated from the worst of the changes, though the longer this new era of higher (or normal as economists see it) rates continues, the more likely it is that mortgage holders will be impacted.

For those that haven’t fixed, they are being urged to consider whether they should before it is too late – if it isn’t already.

"Not so long ago, it was possible to get a fixed rate of just 1.90% (albeit with caveats)," said Mr Cassidy.

"By this time next year the cheapest rate is likely to be over 4%. It’s a big turnaround in a short space of time."

Joe Sheahan, head of credit at MyMortgages.ie agrees.

"The economic uncertainty that is facing us in the New Year, means that we all should be doing what we can now to stabilise our finances where possible and as a mortgage is most people's largest regular outgoing, reviewing your interest rate is the most obvious place to start," he said.