Bad news for tracker mortgages as ECB holds interest rate at 0.75%

The decision by the ECB to hold the main interest rate at 0.75% will come as bad news for tracker mortgage holders, although it is highly unlikely it would have made any difference to holders of standard variable rate mortgages.

Over the past few months, the country’s pillar banks have signalled their intention to increase the interest rate they charge on standard variable rate mortgages, despite the ECB cutting its main interest rate by 0.25% to 0.75% in July.

At its results presentation at the end of July, State-owned AIB announced it would increase the interest rate on its standard variable rate mortgage from 3% to 3.5% on Sept 3.

Bank of Ireland is set to increase its rate by 0.5% to 3.99% on Sept 22.

Permanent TSB cut its rate in July by 0.35% to 4.34%. However, it had been an outlier in the mortgage market because at one stage it was charging over 6% on its standard variable rate. Irish banks are hamstrung by their high cost of funding, mostly what they have to pay for deposits and the Government’s eligible liabilities guarantee scheme, which means they lose money on tracker mortgages because of the historically low ECB rate.

Adjunct professor of finance at TCD, Constantin Gurdgiev, says the pillar banks have had to claw back the losses they are making on tracker mortgages through higher charges on standard variable rate mortgages.

“Most people on standard variable rate mortgages are under the most financial pressure, so increasing the rate on these mortgages actually increases the amount of overall arrears,” he said.

The pillar banks will not be able to transmit ECB rate cuts to all mortgage holders until the sector recovers. But Mr Gurdgiev argues this could be years away as the banks are still sitting on huge recognised and unrecognised losses.