Homeowners face higher mortgage payments

HOMEOWNERS are facing a squeeze over the next 12 months as rising interest rates will hike up typical mortgage repayments by €140 per month, Bank of Ireland warned yesterday.

Borrowing rates would be 1% higher within a year and could begin their upward journey as early as next month, the bank’s chief economist Dan McLaughlin said. He warned there was a “50-50” chance of rates going up by 0.25% in December, after more than two years stuck at record lows.

A 1% hike would send monthly repayments on a 30-year, €250,000 mortgage from €1,065 to €1,205. Dr McLaughlin also predicted further pain for borrowers in early 2007 when he expects rates to rise by a further 0.5%. This would increase typical repayments by another €70.

Joe Larkin, the managing director of the bank’s mortgage arm, said borrowers’ disposable income would take a hit as a result of higher rates. But he added that the blow would be cushioned by the likelihood of the European Central Bank gradually raising rates by 0.25% at a time, rather than opting for a single 1% hike.

Mr Larkin also said Irish borrowers were “in total contrast” to those in Europe by being slow to take out fixed-rate mortgages, which protect borrowers from movements in interest rates but are currently more expensive than standard variable loans. Borrowers appeared to have assumed instead that interest rates would stay at their current low levels, he said.

Dr McLaughlin said higher rates would fail to put a dent in the housing market. He predicted average house prices would rise 10% in 2005 and a 5% next year.

He said the total value of new homeloans handed out by Irish banks this year will exceed €20 billion, with the number of people signing up for a new mortgage tipped to beat the 100,000 watermark for the first time. Total mortgage-related debt is expected to crash through the €100 billion barrier early next year.

Dr McLaughlin said demand was fuelled by the 93,000 extra people who joined the workforce in the 12 months to June. A shift towards smaller households and a growing trend of people living alone would also help the market to remain strong.

The bank also said higher interest rates would mean a greater proportion of borrowers’ pay packets would be needed to service mortgage repayments.

Dr McLaughlin said borrowers would be spending an average of 34% of income on their mortgage in 2006, up from 31.5% this year and 28.6% in 2004.

But he said many households have no mortgage debt outstanding and the overall debt service burden remained “extremely low”.