Mortgage holders on alert for hike

FEARS have been expressed that the European Central Bank (ECB) may raise interest rates in 2011 bringing further heartache for house owners.

Managing director of the Irish Mortgage Corporation Frank Conway said he thinks people should continue to rely on conventional wisdom which suggests the ECB will have to increase interest rates at some point.

“All the signs within the eurozone is for muted economic growth and modest inflation, but with inflation starting to increase beyond the ECB tolerance levels.

“So, at this point, both tracker mortgage holders and standard variable rate mortgage holders should plan for higher mortgage costs in late 2011,” he said.

Mr Conway said that how far the ECB increases interest rates is another question. “I would expect they would start slow, with 25 basis point increases which is a quarter percent at a time with perhaps two month intervals depending on market conditions.

“In 2011, we may escape with a minimum of one rate increase,” he said. Every quarter percent rise to a €100,000 mortgage adds about €15 to repayments. Head of research at Savills Ireland Joan Henry said there is a chance house owners could escape any ECB rate hikes in 2001 as the bank faces a potential dilemma.

“The wider debt crisis which is affecting many member states will put pressure on the central bank to keep rates at the current level of 1% for the whole of 2011 and possibly even into 2012.

“However, the pick-up in economic activity that has gathered momentum in Germany this year, along with higher energy prices will put upward pressure on inflation which could in turn put the ECB under pressure to increase interest rates by 25 to 50 basis points from mid 2011 onwards,” she said.

According to Ms Henry, the dilemma will be balancing the need to ensure that debt crisis can be managed, which requires a low interest rate environment, versus the need to ensure that inflationary pressures are kept under control.

Ms Henry said the German economy will continue to grow but at a slower pace in 2011 and the likelihood is eurozone interest rates as set by the ECB will remain at 1% until late 2011 if not into 2012. She said the maintenance of the ECB rate at 1% in 2011 would be very good news for mortgage holders. ECB interest rates are set at a record low level of 1%.

Meanwhile, two leading industry experts voiced their concern over reports by mortgage brokers last week that banks will push up standard variable interest rates by another 1% this year and that it is expected that variable interest rates will start to rest at or above 5% by 2012.