Mortgage holders in Ireland will face an additional cost blow over the coming months as the European Central Bank (ECB) opted to hike the mortgage interest rates once again. The impact of rising interest rates on mortgages was a mere 0.5% but will cost the average tracker mortgage holder around €1,650 extra each year (ie approx. €137.50 per month). Interestingly, the average interest rate in Ireland now stands at 3.84% pa, up approximately two percentage points over the last 18 months.

It is expected that there may be at least 1 more interest rate hike in the coming months, as the ECB bids to stave off inflation. The only silver lining is that eurozone inflation has started to fall after hitting a peak of 10.6% last October, even though prices excluding energy are still growing a steady pace.

This latest interest rate increase will not just hit the pockets of tracker mortgage holders, as the expectation is that the hikes will be passed on to both variable and fixed rate mortgage holders in due course. Of course, fixed rate mortgage holders will be insulated from any rate hikes until such time as their current fixed rates expire. That’s good news for those who fixed their rates at any time up to the end of 2021 (where 5 year fixed rates were as low as 2.50%) as they are “locked-in” until possibly the end of 2026.

Of course, the bad news for mortgage holders is that along with the mortgage interest rates their monthly repayments are also increasing, but so too is the total amount of interest that they will pay over the lifetime of the mortgage. So, for example, a borrowing of €200,000 at a notional fixed rate of 3.00% over 20 years will cost €1,106.43 per month, which is the equivalent of €65,543.20 in interest payments. If this borrowing started off at a notional rate of 5.00% per annum over the full 20 years, then the monthly repayments would increase to €1,314.43 per month, which is the equivalent of €115,463 in interest repayments ie an additional €49,920 or €2,496 per annum.

So, what are the options for mortgage holders who are facing the prospect of further interest rate hikes:

1.   To Fix or Not To Fix? – This is probably the single most asked question we are encountering at present. We do not have the benefit of a crystal ball, but all indications are that there will be further interest rate hikes in the coming months. If you’re on a tracker, variable, or due to come out of an existing fixed rate agreement, then you should strongly consider fixing your mortgage repayments for a period of perhaps 3 – 5 years. This will give you certainty for that timeframe, albeit there is of course the possibility that rates will come back down again during the fixed rate term. Like anything, it will depend on your circumstances, how much you owe, term remaining etc. It’s very much on a case-by-case basis.
2.   Pay down your mortgage balance – It is well documented that there has never been as much cash in the country. As we all know, deposit rates are still extremely low. For example, many Irish banks are offering 0.1% (before DIRT) for lump sums their customers hold on deposit. So logically, it makes no sense to pay back interest in excess of 4.50% on the full mortgage balance. The savings can be significant. For example, a lump sum repayment of €10,000 would save a borrower €4,400 in interest repayments based on an outstanding mortgage balance of €200,000, with a term remaining of 20 years and at a rate of 4.00% pa.
3.   Shorten the Term – In the example above, if the borrower applied to reduce the mortgage term from 20 years to 15 years, it would result in mortgage repayments increasing from €1,207.94 per month to €1,474.46 per month. However, this would result in a significant interest saving of €24,502.80 over the shorter timeframe. This will of course depend on the borrower’s repayment capacity but is certainly an option given the level of potential savings.
4.   Shop Around – Many mortgage holders are currently in the enviable position of having relatively low Loan To Value % (LTV) on their homes. This means that the value of their property is significantly greater than the mortgage they hold on it. Many lenders will offer borrowers the opportunity to “switch” their mortgages to more favourable rates elsewhere, depending on their Loan To Value. In some cases, lenders will offer a cash bonus as an additional sweetener to fund the costs of moving i.e. legal / broker fees.

There is certainly a lot to consider but the big takeaway is that borrowers need to start dealing with the reality of rising interest rates. It is vital that you understand the important details of your existing mortgage ie amount owing, value of your property, term remaining, current repayment amount and rate, as well as what rate(s) you are being offered. Once you have these details, you will be in a good position to assess your options.

If you feel you need some specific mortgage advice on this matter, contact us at 061-337578 or email info@olliemoranfs.com.