Homeowners face hike in mortgage repayments

Ian Guider

As expected, the European Central Bank (ECB) increased interest rates by 0.25%, pushing up the cost of borrowing to 2.25%.

The increase means than a person who has a 25-year €200,000 mortgage will have to repay €25 more every month.

So far only Bank of Ireland and the ICS Building Society have increased their fixed mortgage lending rates, though more institutions are expected follow in the company days.

The Financial Regulator has urged borrowers to ask their financial institution if and when they increase will be passed on.

“Clearly the rise in interest rates may mean increased costs for loans in the future so it is more important than ever to shop around for the lowest interest rates on all of your loans,” the Financial Regulator said.

Yesterday’s rise is expected to be the first of several in the coming year, though economists do not see interest rates rising beyond 2.75%-3% over the next 12 months.

Ulster Bank economist Niall Dunne said the increase was not unexpected as the ECB’s sole consideration when setting interest rates was the outlook for inflation and not economic growth.

“Inflation is above the ECB target of 2%, and has been for some time. But they held their nerve because economic growth was so weak and didn’t raise rates,” Mr Dunne said.

“From an inflation point of view I can understand why the hike has been made. I would be a little bit scared that it would derail the economic recovery in Europe.”

Interest rates have been at historic lows for some years; before the economic slump in Europe and the September 11 2001 attacks on American rates were close to 5%. While the US Federal Reserve Bank and the Bank of England have sharply increased borrowing rates, the ECB signalled that it will not follow suit.

“We are not planning ... a series of rises,” ECB president Jean-Claude Trichet said in Frankfurt yesterday.

Austin Hughes, IIB Bank chief economist, said if rates did go to 3% next year, it would be enough to shave 0.5% of Irish economic growth and cost borrowers €1 billion in extra interest payments.