Homeowners face prospect of higher mortgage payments and plunging house prices as banks look to reduce losses

HOMEOWNERS are facing a year of interest rate hikes and plunging house prices as banks look to claw back losses.

Mortgage experts are predicting that 2010 will see many of Ireland’s financial institutions increase interest rates and also that the European Central Bank (ECB) will increase rates from their record low of 1%.

This will come at a time when Ireland is struggling to recover from the economic downturn that has seen up to 50% wiped off the value of some properties.

Homeowners have seen substantially reduced mortgage repayments over the last year, with some seeing their mortgage bill falling by as much as €600 per month between the peak of interest rates in June 2008.

Irish Mortgage Corporation director Frank Conway said this fall has significantly shielded many homeowners from the worst of the economic meltdown.

However, he thinks that 2010 will be a year of “great challenges” for many people.

“I have no doubt that many people are slowly working their way through their savings accounts to keep paying their bills. The big challenge for many people is what they will do if and when interest rates begin to increase again.

“Remember, we are still experiencing the lowest interest rates in recent memory.

“While the ECB is loath to raise rates before the eurozone economy improves, a significant improvement in the eurozone economy will have to bring higher interest rates. This may happen before the Irish economy has returned to sustainable growth.”

Most economists believe that interest rates will begin to be slowly increase around mid to late 2010. A quarter point increase in interest rates results in approximately a 3% increase in mortgage repayments.

Ulster Bank chief economist Simon Barry said: “My base case is that the ECB will begin raising its official interest rate in the final quarter of 2010, though it could come sooner if the world and European economies surprise to the upside in coming quarters.”

Other economists, however, believe the ECB may not decide to increase rates until 2011.

In addition to the ECB, mortgage holders who hold standard variable rates on their mortgages also face a second challenge in that their bank reserves the right to increase those rates to homeowners, said Mr Conway. It is predicted that other mortgage lenders will follow Permanent TSB, which has already moved to increase rates on standard variable mortgages.

The Mortgage Finance Company director Kevin McNerney said recent signs that the worst of the global recession is now behind us may force the ECB to act sooner than they had previously hoped. “Some leading economists are now predicting the ECB will start increasing rates from June 2010 and that by the end of that year the base rate will have increased from 1.0% to 1.75%,” he said.

This interest rate uncertainty comes at a time when house prices are continuing to decline.

Recent ESRI figuresindicate house prices have fallen by over 11% in the first nine months of this year, with Dublin prices dropping by 14.4% in the same period. Although a recent report from a group of industry experts, the Irish Auctioneers and Valuers Institute (IAVI), indicates that prices have dropped by an average of 24% since the beginning of the year.

“However, there are indications some degree of normality is coming back to the property market, with early signs that we may be reaching a bottom, particularly in the more affordable areas,” said Mr McNerney.

He also said that estate agents are seeing a big increase in viewing levels and some mortgage providers are claiming new applications are up 66% since the first three months of this year.

“This all gives positive indicators that consumers are getting confident in the market again. While many buyers are waiting for the market to reach the bottom, all indications are that it may not be very far away,” he said.

Irish Brokers Association chief executive Ciaran Phelan said: “It is likely that property prices will fall further in 2010 as supply continues to outstrip demand. How much further is impossible to tell and will differ depending on the location.”


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