Mortgage rates are set to rise as ECB signals increase

FEARS have intensified that the European Central Bank (ECB) will definitely hike interest rates next month, resulting in increased mortgage charges for many house owners.

Director of the Irish Mortgage Corporation Frank Conway said hopes have been dashed that the ECB may delay increasing interest rates as officials have now indicated the economic uncertainty caused by Japan’s earthquake may not deter them from raising interest rates next month.

ECB executive board member Gertrude Tumpel-Gugerell and Governing Council member Yves Mersch said this week that “strong vigilance” is necessary to keep a lid on inflation, a phrase the bank uses to signal a rate increase is imminent.

ECB president Jean-Claude Trichet also told the European Parliament he has “nothing to add” to his remarks earlier in March, when he said policymakers may raise the benchmark rate from a record low of 1% at their next meeting in April.

“Any rate increase cycle announced by the ECB in April is expected to begin modestly, at about a quarter percent. However, once the ECB begins increasing rates, it tends to be part of a cycle. The ECB does not do one-off rate increases,” said Mr Conway.

He said the ECB tends to work in cycles and mortgage holders here should prepare their personal finances for anything up to a 0.75% to a 1% rise over a 12 month period.

Since its foundation, the ECB has managed two distinctive periods of rate increase cycles, these include one between November 1999 and October 2000 when the cumulative increase was 2.25%. This was followed by another one between December 2005 and July 2008 when the cumulative increase was also 2.25%.

A 0.25% increase to the base rate of interest will see mortgage repayment in Ireland increase by about €45 per month on a €300,000 mortgage.

A full 1% increase over a 12-month period would result in mortgage repayment increasing by €180 per month per €300,000 or over €2,160 per year.

“News of a rate increase will not come as a surprise to mortgage holders here in Ireland. Those with tracker mortgages have benefited from record low rates for almost two years.”