In the Programme for Government agreed last month, the Coalition promised that bailed-out banks would have to cut their costs enough to absorb a 0.25% increase in interest rates.
They were urged to clarify this policy when the European Central Bank (ECB) increased rates by 0.25% yesterday.
Almost 800,000 homeowners will be affected by the move after AIB, Bank of Ireland, ICS and National Irish Bank said they would pass on the hike to tracker mortgages. Permanent TSB said it has made no decision yet.
Junior Finance Minister Brian Hayes said the announcement was “most unwelcome” and that the Government is still determined some future increases will be absorbed by banks.
Cleaned-up banks will be able to access private sector funds, leaving them “in a better position to forego some of the increases that may come on stream if the ECB decides to increase the rate”, he said.
“The Central Bank will be driving banks to get the costs down so those efficiencies can be passed on to hard-pressed lenders.”
About 80% of the 790,000 mortgages in Ireland are tracker, meaning they follow the ECB rate. They are likely to see a €45 a month increase on a €300,000 mortgage.
Irish Brokers Association chief executive Ciaran Phelan, said there is “almost no possibility” for those still on tracker mortgages to switch to fixed at this stage, adding that the “boat has sailed”.
According to the Central Bank, almost 45,000 mortgage holders are 90 days or more behind on repayments. Experts say there could be as many as 100,000 homeowners struggling to make monthly repayments.
Fianna Fáil TD Michael McGrath said it’s time for the Government to “come clean” about whether it intends to keep its promise.
Aoife Walsh of housing charity Respond said: “This Government does not have the luxury of kicking the can down the road.”
Sinn Féin said that despite the urgent need to do something to help at least one-in-10 homeowners who are struggling with repayments, the Government was “asleep at the wheel”.
Deputy leader Mary Lou McDonald said: “This is not an issue that can wait. People are under pressure now; people are having their homes repossessed now; people cannot meet their mortgage repayments now.”
Mr Hayes said the Government is planning a number of initiatives to help struggling homeowners, which may be announced as part of the jobs budget in May.
“The Government is going to take a very tough stance with these banks. We recognise the difficulties that people are in right now but there is a myriad of other proposals that are currently in place or may go in place over the next few months to help people in this distressed situation,” he said.
It is expected that this hike could be the first in a series of rate increases over the next 12 months and many analysts expect rates to rise by 1% in that time. This would add an extra €180 a month to a €300,000 mortgage.
Bank of Ireland and ICS Building Society are increasing their fixed-rate mortgage products due to the increased costs of funding mortgages.
“While we have resisted increasing rates until now, we have no choice but to make this move to ensure we remain open for business and continue to support our customers and the Irish economy going forward,” said head of mortgage at the bank, Jonathan Byrne.
Ernst & Young economist Marie Diron said the ECB hike is in part aimed at preserving the ECB’s credibility as a central bank focused on keeping inflation low.
She added, however, that they think the move to increase rates is a mistake.
“For Ireland, higher rates will only prolong the crisis of the housing and construction sectors. We think that the risk to our forecast of a moderate further fall in house prices this year are on the downside.
“Households in particular are taking a major hit with rising unemployment, downward wage pressures and austerity measures damaging disposable incomes.”