Fixed-rate mortgage warning on ECB rate rise

By Eamon Quinn

Home buyers have been warned off buying fixed-rate mortgages of two or three years because borrowers will likely be exposed as the ECB starts hiking rates by the end of next year, a leading expert has said.

The warning comes as the Central Bank’s latest report on interest rates showed fixed-rate mortgages continued to be the favoured choice of borrowers, even though the cost of mortgage loans are still the highest in the eurozone by a wide margin.

Many of the new fixed-rate home loans agreed will be up to two or three years, as most lenders compete over short-term fixed rates rather than in variable rate mortgages.

But financial adviser Michael Dowling said that three lenders, in particular, were battling for the cheapest fixed-rate loans and that his advice for borrowers was to avoid fixing into rates over one or two or three years, as the potential for the ECB to increase interest rates draws closer.

Markets are betting that the ECB — which is winding down its huge bond-buying programme that has underpinned the crisis-era cheap money policy — will start hiking interest rates by the end of next year.

“It would need to be five years,” he said for borrowers to avoid the risk of the ECB starting to raise rates next year.

Mr Dowling also said the amount of so-called annual exceptions lenders can make to the Central Bank mortgage lending rules, which help provide a degree of flexibility to first-time borrowers, has been exhausted in recent weeks.

That means that first-time buyers may be forced more than ever to tap family members, as house prices continue to rise.

The Central Bank said that excluding renegotiations of existing home loans that there were €7.5bn of new mortgages sold in the 12 months to the end of June.

Some 59% of all new home loans were for fixed-rate mortgages in the three months to the end of June.

Mr Dowling predicted the market would be worth €9bn for the full year and “assuming no major economic hiccups” it would be worth between €10bn to €11bn in 2019. The value of the market in 2020 would “be interesting” as it faces the challenges of rising ECB rates, he said.

The Central Bank figures showed that the average fixed rate mortgage so far this year stood at 3.1%, which suggests that following more recent cuts by lenders that the average rate could fall below 3%.

Karl Deeter of Irish Mortgage Brokers said the “universal advice” remains to buy the mortgage with the cheapest rate for the longest term because most Irish banks are charging much more for their variable rate mortgages than other European lenders.

He has not ruled out the possibility that Irish lenders would trim home loan rates further even as the ECB rate rises draw closer because the banks’ margins, he believes, have widened further.

Mr Deeter also said that housing shortages would likely put further pressure on rents, showing the Government’s rent caps regime wasn’t doing its job.

Large rent increases will continue to be the bellwether for the housing market and homelessness, suggesting that low-income households will face further hardship, Me Deeter said.

The CSO’s consumer price index published earlier this week showed rents rose 0.3% in July from June and climbed sharply, by 6% from a year earlier.

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