Mortgage pain as rates set to rise by up to 1%

HOMEOWNERS are likely to be hit by increases in mortgage interest rates in the first few months of the new year as lenders aim to claw back some of their massive losses.

Banks could increase standard variable rates (SVR) by up to 1% this year, which would add €130 a month to a typical €250,000 mortgage.

Karl Deeter, operations manager with Irish Mortgage Brokers, predicted in 2009 that banks would increase rates by 1% in 2010, which they did.

He now expects that rates on regular variable mortgages will go up again in the first quarter of 2011.

“The amount is likely to be 25 to 50 basis points and one or two more through the year, bringing the total for 2011 on variable rate margins up by about 0.75% to 1% on residential variable rates for existing customers,” he said.

Ciaran Phelan, chief executive of the Irish Brokers Association, also said banks are likely to increase standard variable interest rates again in 2011, adding that hard-pressed mortgage- holders are “literally at the mercy of the banks”.

“Based on funding costs, the norm for SVR is likely to settle at about 5%, significantly above the level most people signed up for their homes in recent years,” he said.

The average standard variable rate in the mortgage market here is now between 3.5% and 4%. Around 200,000 homeowners have SVR mortgages in Ireland.

Those on SVR mortgages are at the mercy of the banks, which can increase rates at any time. Those on tracker mortgages are exempt from this as their rates track that of the European Central Bank (ECB).

Managing director of the Irish Mortgage Corporation Frank Conway said, however, that he suspects individual banks will be loath to increase interest rates.

“With over 40,000 residential mortgage-holders 90 days or more in arrears on their mortgages, it could fast become hugely counter- productive for banks to risk increasing interest rates on top of ECB increases,” he said.

Head of research at Savills Ireland, Joan Henry, said pressure needs to be kept on Irish banks to ensure that they do not increase SVR any more, independent of the ECB, in 2011.

“Permanent TSB and AIB in particular have already squeezed SVR mortgage- holders throughout 2010 independent of an ECB move. Mortgage-holders have taken additional pain from the banks, who desperately need to raise capital and are going for the easiest targets,” said Ms Henry, adding that no further increases ahead of an ECB move should be tolerated by the Government, the regulator or customers.

“To allow this would increase the risk of pushing some of these SVR mortgage-holders into arrears and would also take more cash out of the economy,” she added.