ECB hikes could drive Irish mortgage rates to 5% by next summer                   

From this year, a household on a tracker mortgage of €300k could see its repayments rise by almost €450 a month

Irish households coming off fixed rates in the next year will face significant increases in the cost of their mortgage loans

The European Central Bank will likely hike interest rates more than expected, which means that Irish mortgage rates could jump to 5% by next summer, experts have said.

It comes as the US Federal Reserve increased rates by a hefty three quarters of a point on Wednesday night, while the Bank of England on Thursday sanctioned a half-point increase to bring British key interest rates already to 2.25%. 

Michael Dowling, a leading mortgage broker, said Irish households coming off their fixed rates in the next year will face significant increases in the cost of their mortgage loans.

Should the ECB drive a key interest rate to 3% by next May, any of the 330,000 Irish households coming off their fixed rates could potentially see the cost of their loans jump to 5.5% from 2.5% currently, Mr Dowling said.

Around 200,000 households whose tracker mortgages are directly linked to the ECB rates will be paying rates of 3.5% or 4% by next summer, up from as little as 0.5% they were paying for many years. 

Mr Dowling said that each 1% hike in rates on a €100,000 loan over a term of 30 years adds €52 to the monthly cost of servicing a mortgage.  

From this year, a household on a tracker mortgage of €300,000 paying a margin of 0.5% above the ECB rate will see its repayment rise from €898 a month to €1,347 a month, an increase of almost €450.  

Households on a variable mortgage of €300,000 paying a rate of 4% will see their repayments rise from €1,432 a month to €1,996 a month, an increase of €564, assuming Irish banks pass on the ECB rate hikes.  

Fixed rates

Mr Dowling said he advises that borrowers on expiring fixed rates should strike longer-term fixed rates with their banks. 

Economist Austin Hughes said key ECB rates could rise to 3% by next summer. However, he hoped "wiser heads prevail” because the European economy with its exposure to energy costs has more to lose from large interest rate hikes, he said.

“You can’t rule out rates going there or beyond, but I think that it would be monumental policy error,” Mr Hughes said, adding that rates must rise but not to excessive levels.

Lee Evans, the head of UK interest rate trading at Bank of Ireland, said that after the Bank of England increased interest rates by half a point on Thursday that markets were already anticipating a further UK hike of three quarters of a point in November.

“The terminal rate — the expected high point in the interest cycle — is over 5% in the UK, with some members highlighting that the latest fiscal spending by the UK government could boost demand, and in turn, provide further upside pressure to inflation," Mr Evans said.