More pain due as mortgage interest rates to rise

Mortgage rates and other expenses are increasing, but what are people doing to offset the rising cost of living? John Hearne finds out

Last week, Avant Money — one of the cheapest mortgage providers in the market — announced that its rates were on the way up.

This is the second bank to signal a rate rise this year, which is leading some commentators to conclude that the golden age of low mortgage rates is coming to an end.

Avant is increasing its five, seven, and 10-year rates by up to 0.30%. The five-year fixed rate for first-time buyers with a 10% deposit is increasing by 0.20% to 2.40% while the 10-year rate will increase by 0.30% to 2.70%.

In March, ICS Mortgages announced increases to its three- and five-year fixed rates. For those looking for loan to value (LTV) rates of 80% or less, the three-year fixed rate went from 2.20% to 2.45%, while the five-year fixed rate went from 2.20% to 2.60%. Not huge jumps, but not that small either.

At the time, Ray McMahon, chief commercial officer at ICS Mortgages, said that these fixed-rate increases reflected the significant upward pressure on the cost of financing fixed interest rate products in the international markets.

“This is a result of considerable rate movements in capital markets due to inflationary pressures being felt across Europe and globally,” Mr McMahon said.

That was back in March. Since then, the Federal Reserve, which is the US central bank, increased rates by 0.5% to 1%. This was the first time the Fed increased rates by more than 0.25% in one go since 2000.

In Britain, meanwhile, the Monetary Policy Committee of the Bank of England has increased rates four times to 1% since last December. As things stand, these rates are expected to continue to climb, and are likely to amount to a full 2% before the end of the year. The Australian and New Zealand central banks meanwhile have both hiked interest rates recently.

It’s all down to inflation, which is now a worldwide phenomenon. In the US, it’s already hit 8.5%, which is a 40-year high, while in Britain, it’s expected to reach double figures by the end of the year. A 10% inflation rate hasn’t been seen there since the 1980s.

The European Central Bank (ECB) had has been slow to react to these gathering pressures.

Many central banks have mixed policy objectives. The Bank of England for example, targets an inflation rate of 2%, but will also support government aims for growth and employment. In the US, the Federal Reserve also focuses on low employment and economic growth in addition to keeping inflation in check.

The ECB, however, has one explicit goal: price stability. This, it defines as an inflation rate of close to, but just below, 2%.

Deflation — that is, falling prices — is often as damaging to an economy as inflation, because in a world of falling prices, consumers put off spending in the expectation of getting goods and services cheaper down the line, and that in turn depresses economic growth. Up until recently, the ECB had been more worried about falling than rising prices, which is why it reduced its main lending rate to 0%.

At the moment, the ECB’s overnight deposit rate stands at -0.5%. Effectively, this means that other banks have to pay for the privilege of the ECB holding their cash reserves overnight.

The ECB has been very slow to react to the rapid rise in inflation because underlying economic trends have remained weak, and the price spike was seen largely as a result of short-term fuel price increases. But that view is beginning to shift.

We know this because the ECB has recently confirmed that it will conclude its asset purchase programme in the third quarter of the year. This was a long-running bond buying initiative which sought to increase the supply of money and spur lending across the EU. In addition, we’re hearing more and more reports of hawkish ECB members who see the inflationary spiral as more than temporary, and are anxious to begin using interest rates to deal with it.

Eurozone inflation is now running at 7.5%, over three times the ECB target, and its highest level since the euro was created over two decades ago.

Against this backdrop, mortgage holders who are not tied into fixed rates need to look again at their options.

Noting Avant Money’s announcement last week, Trevor Grant of the Association of Irish Mortgage Advisers said: “If people were putting off fixing or switching until now, they have no further excuse. This is likely to be the first of a number of increases.”

He points out that you can still fix for between 25 and 30 years at under 3% with at least two lenders, and that these products offer flexible overpayment facilities.

“Rates have been at historically low levels for some time and educated mortgage holders should be considering their options to lock in and protect themselves against future rate increases which are inevitable,” he said. “Even those on existing fixed deals should ask their lender if there are break fees to fix with the same lender or elsewhere.”

You pay break fees if you want to get out of a poor value fixed or tracker deal. Before you do this, make sure to do the maths and ensure that it’s worth it.

For the past number of years, over 80% of new mortgages have been fixed for three or five years. Longer-term fixed rates now need to be considered, says Grant “as long as full product features are clearly understood”.

These developments come hot on the heels of the release of two surveys looking at how we’re reacting the rapid onset of inflation.

A Taxback.com survey found, unsurprisingly, that 90% of us are feeling the pinch as a result of soaring fuel costs.

Barry Cahill of the company says that its survey found that spending less was by far the most popular measure people plan to take to curb the impact of rising prices.

“This will have a knock-on effect on the wider economy, particularly at a time when businesses are trying to recover from the pandemic. A quarter of people said they will aim to save more, with one in 10 believing they will seek financial assistance and/or advice from either a friend or family, or a lender or a financial expert.”

Interestingly, seeking a pay rise is only seen as a core solution by one in ten of those asked.

At the same time, insurance company Royal London Ireland published a survey which found that more than a third of people would find it hard to open up about their financial troubles, with more men (38%) struggling with this than women (33%).

Karen Gallagher of the company points out that this is particularly relevant in the context of the spiralling cost of living. She said: “People’s personal and household finances are having to stretch further than ever. It’s important to have somewhere to turn, or someone to turn to, when it comes to money-related stress.”