Michael Dowling: Mortgage costs mount for second hand buyers

Large differences between mortgage repayments for buyers of new and second-hand properties must stop

The European Central Bank. There is evidence that increases are impacting on borrowers’ ability to service their debts.

The European Central Bank has raised interest rates eight times in the last year with its base lending rate now at 4%, with a further 0.25% rise on the cards when it meets later this month.

The central bank met in Lisbon last week and there were mixed messages emanating from the delegates. On one side, ECB president Christine Lagarde and the Belgian governor Pierre Wunsch appeared to be advocating for a further rise in September, while the Italian, Spanish, and Portuguese delegates were more cautious.

That view appeared to be shared by Philip Lane, the ECB chief economist, who said it was too early to make a call on further rate rises.

For hard-pressed mortgage holders, we need certainty around repayments: There is evidence that the increases are impacting on borrowers’ ability to service their debts.

The latest report on mortgage arrears by the Central Bank, up to the end of March, showed an increase in early arrears — of up to 90 days — of 3,639. The Central Bank said 1,300 of this group was due to a “reclassification”, but the trend is worrying nonetheless. And the figures do not reflect the rate increases since March.

Let’s look at the impact of the rate rises: There are 171,000 tracker mortgage customers with an average balance of €133,000 over a 11-year term. The average tracker rate is a margin of 1.15% above the ECB rate, which means that tracker interest rates are running at 5.15%. Including the anticipated rate increase in July, annual repayments for a tracker mortgage holder will have increased by €3,000.

On fixed rate mortgages, there are 71,000 mortgage holders whose fixed rates expire this year. They will face rate rises of between 2% to 2.5%, which will add €3,540 annually to their repayments.

Around 60% of the market, or 430,000 mortgage customers, have longer-term fixed rates, and should be cushioned from some of the impact of the rate rises because their fixed terms will not expire during this cycle of intertest rate rises.

However, we have 60,000 mortgage holders who are “trapped” with vulture finds with no fixed rate option available who are paying interest rates of between 8% to 9% currently. The Central Bank must look after these vulnerable customers because we cannot trust the funds to offer the right solutions.

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There is a further worrying trend. AIB Group which owns AIB, EBS and Haven Mortgages last week announced very significant rate rises. AIB Group has a market share of around 33% and has increased its most popular three- and five-year fixed rates by up to 0.7%. With the average mortgage at €300,000, this rate increase alone will add €1,500 per annum in increased repayments on the five-year fixed rate.

However, AIB Group has not made any adjustments to the so-called “green” rates which effectively apply to new properties only, with a BER rating of A1-B3. I can understand the purpose of offering cheaper rates to people buying new properties.

However, in the case of AIB, the rate differential between a customer buying a new property and a customer buying a second-hand property on a five-year fixed rate is 1.15%.

Taking a €300,000 mortgage, the customer buying a second-hand property will pay significantly more each year. Such discrimination must stop.

The Government is encouraging people to buy vacant or derelict second-hand properties through the Housing for All initiatives, with grants up to of €50,000 for vacant properties and up to € 70,000 for derelict properties.

The unwelcome trend by AIB will not help.

Michael Dowling is head of Dowling Financial