Mortgage interest rates shot up in January, and there are more rises on the way

Rising interest rates will have a major impact on affordability of homes, with mortgages now costing hundreds of euro more a month than last year, say experts

Ireland continues to have among the cheapest mortgage rates in the Eurozone, for now at least. Picture: iStock

Irish mortgage interest rates shot up in January, according to new figures from the Central Bank. The average interest rate on a new mortgage was 2.93%, up from 2.69% in December. This leaves rates at their highest level since October 2019.

Despite the big jump, Ireland continues to have among the cheapest mortgage rates in the eurozone, for now at least, with only France and Malta recording lower rates than Ireland in January.

The eurozone average is now 3.16%, well over double the rate this time last year.

Daragh Cassidy of independent price comparison and switching site Bonkers.ie says interest rate hikes by the European Central Bank are finally beginning to emerge in Irish mortgage rates.

“Initially the banks were slow to pass on the ECB rate hikes but this is now starting to change. And the average rate will shoot much higher over the next few months.”

Average mortgage rate in select Eurozone countries for January

Country	Rate
Latvia	5.09%
Germany	3.73%
Netherlands	3.66%
Portugal	3.46%
Belgium	3.33%
Eurozone average	3.16%
Ireland	2.93%
France	2.31%
Malta	2.09%

Permanent TSB hiked its fixed rates for the third time since November earlier this month, which leaves many of its rates for the average first-time buyer at over 4.5%. Customers with an offer letter who draw down their mortgage by June 2 can avail of the existing rates.

The bank’s two-year fixed rate for those with a 10% deposit will now be 4.6%. And its seven-year fixed rate for those with a similar-sized deposit will be 4.9%. 

PTSB’s lowest fixed rate remains its four-year rate for those with at least a 40% deposit, which is now 3.9%. However, this time last year the rate was just 2.05%.

For someone borrowing €300,000 over 30 years, the latest increase will add about €130 to monthly repayments.

“However, even after this latest increase from PTSB, its third since November, it's only passed on just over half the recent ECB rate increases. But this ‘generosity’ has largely come at the expense of savers who are still getting some of the worst savings rates in all of Europe,” Mr Cassidy said.

He expects that PTSB, along with AIB and BoI will all come under big pressure in the weeks ahead to significantly improve their savings rates.

Looking forward, things don’t look great for those on trackers, variable rates or people who are looking to buy over the coming months.”

Two weeks ago, the ECB decided to stick to its guns and raise rates by another half a per cent, despite calls from some commentators to hold off in the face of turmoil in the banking sector. The move was as clear a sign as you are going to get that the bank is determined to get on top of inflation, which continues at high levels.

Daragh Cassidy expects at least another quarter of a per cent rise before the summer is out.

He says, “This will take the main lending rate to 3.75%, though it looks increasingly likely that it will go even higher. This means yet more rate increases from all the lenders are guaranteed over the coming months.”

Huge impact on affordability

“Up until the middle of last year, it was possible to get a mortgage rate as low as 1.90% in Ireland — albeit with several caveats. By the end of the year, the cheapest rate is likely to be over 5%, with the average rate even higher. The impact this will have on affordability will be huge.”

Darragh Cassidy of Bonkers.ie: 'Initially the banks were slow to pass on the ECB rate hikes but this is now starting to change.'

He takes the example of someone borrowing €300,000 over 30 years at 5%. Monthly repayments in this instance come to €1,610. That’s about €500 more each month compared to someone borrowing the same amount at 1.90%. Borrowing €300,000 at 6% will cost almost €1,800 a month or about €700 extra each month.

These are big sums of money. The question is whether buyers can afford the higher repayments or whether house prices will fall instead.

Trevor Grant of the Association of Irish Mortgage Advisors points out that against a backdrop of rising rates, p rotecting themselves against future interest rate increases has become a priority for variable, tracker rate mortgage holders, and for fixed-rate customers whose current fixed rate agreement is due to expire within the next 12 months or so.

“While there is still good value on offer from lenders, the timeframe in which to capture this value appears to be getting smaller and smaller. There’s really only one way that a mortgage holder can escape these additional costs and that’s by reviewing their mortgage options right now — whether you’re on a fixed, variable or tracker mortgage now is the time to act.”

He too anticipates more rises in the pipeline and points out that these will put even more pressure on households already struggling with the cost of living.

Incentives

As these interest rates edge higher, lenders continue to offer incentives to sweeten the deal. For instance, Permanent TSB is offering 2% of your entire mortgage back in cash, while Bank of Ireland is offering up to 3% cashback. 

And AIB offers a discount on your home insurance for the first year as well as free day-to-day banking if you pay your AIB mortgage from an AIB current account.

“Offers such as these are certainly worth considering, and it’s particularly easy to understand the lure where cashback is concerned — it’s wonderful to finally secure your dream home with a mortgage but it’s not much good if you have no money to furnish it,” Mr Cassidy said.

According to the Banking & Payments Federation Ireland, the average first-time buyer loan is about €270,000. If you were to take out a €270,000 mortgage with BoI, the 3% that you would get back in cash would give you €8,100 in total (€5,400 upfront and €2,700 after five years if you have a BoI current account), which is certainly nothing to be sniffed at.

Daragh Cassidy sounds a warning note however. “But before you’re swayed by any lucrative cashback offers, spend an equal amount of time considering their value over the lifetime of your loan. This is because the lenders which offer the best cashback deals often charge higher rates.

He points out too that while rising interest rates make life more difficult for mortgage payers, they do create better conditions for savers.

In announcing their rate hike this month, PTSB also said it was increasing its rates for savers — but only by up to 0.5 percentage points, with the increase on some savings products much smaller.

In the context of inflation near record highs, it is small potatoes, especially when you factor in Dirt (deposit interest retention tax) at 33%. 

While the banks have now begun passing on mortgage rate hikes to customers, they are far slower to pass them onto savers.