Homeowners face further mortgage hit

HOMEOWNERS are facing another hike in mortgage repayments after the European Central Bank (ECB) voted to increased interest rates.

The ECB raised its main borrowing rates by 0.25% to 2.5% - the second increase in just three months.

The bank’s decision means homeowners will have to pay €29 a month more for every €100,000 borrowed.

But Marie Hunt, economist at estate agents CB Richard Ellis, said yesterday’s increase, and any further rises, are unlikely to have any significant impact on property market’s performance in the short to medium term.

“Regardless of interest rate hikes, the property market will continue to perform strongly in 2006 on the back of positive economic conditions, in particular strong employment trends and favourable demographic trends including high levels of immigration and falling household sizes,” she said.

Ms Hunt added that existing homeowners will not struggle to repay as financial institutions stress test borrowers to take account of interest rate rises.

She warned, though, those most under pressure are likely to be first-time buyers and those at the lower end of the residential market who are heavily geared.

As of last night, the increase has not yet been passed on to consumer by many financial institutions. Some have yet to pass on the full 0.25% rise from December.

The increases may go some way to dampen consumer spending, which has been growing at an alarming rate for some time.

The Central Bank has repeatedly warned that Irish consumers are borrowing too much.

To economists, the increase came as no surprise as the European economy, which has lagged world growth for some years, is beginning to show signs of picking up.

“The economic recovery in Europe ... remains fragile ... but the ECB view current rate levels as overly accommodative,” said Paul Niven Head of Asset Allocation at F&C Asset Management.

Oliver Gilvarry, senior treasury dealer with Bank of Scotland (Ireland), said rates could reach 3% by the end of this year and rise further in 2007.

The rise in interest rates is not all bad news, according to the president of accountants’ body ACCA Ireland.

Gerard Loughnane said rising interest rates will increase annuity rates, which in turn will boost pensions.

“When the recent 0.5% increase in interest rates starts to be reflected in future annuity rates, an employee on the average industrial wage ... will expect to be almost €50 a week better off on retirement,” he said.