Q&A: What is happening to mortgage rates and how will it affect me?

Higher interest rates make for higher monthly repayments, which means your borrowing capacity will be reduced when you seek a mortgage. File Picture: iStock

The European Central Bank has announced its first interest rate increase in 11 years this coming July, followed by a second increase in September. Neil Michael looks at what it means for Irish mortgage-holders.

So how much has the European Central Bank hiked rates by?

The European Central Bank is to increase interest rates by 0.25% in July. The ECB also said a second rate increase, possibly by a bigger margin, will follow in September.

Is that it, or will there be more interest rate increases?

No, this is not it. In May, after the Federal Reserve raised interest rates for the first time since 2018 in a bid to tackle mounting inflation in the US, and just hours after the UK raised their own interest rates, the European Central Bank’s Chief Economist Philip Lane warned: “We’re going to be moving rates, not just once, but over time, in a sequence.”

So, while the first increase is due in July, it may not be the last: there are concerns rates could rise to up to 2.5% by 2024.

What does that mean to my monthly repayments?

An increase between 0.5% and 1% in interest rates on a tracker mortgage of €250,000 over a 30-year term would see a current repayment of €804 a month rise to between €862 and €924, an increase of between €60 and €120 a month.

With 200,000 customers on variable rates paying an average of 3.75%, an increase of between 0.5% and 1% on a €250,000 mortgage would see current repayments of €1,158 a month rise to between €1,231 and €1,304 a month, an increase of between €73 and €146.

This means that variable rate customers will pay between €26,500 and €53,000 in additional interest over the term of the loan.

Why is it happening now?

Hiking interest rates is a way of helping control inflation. And the reason why inflation is rising is because of the war in Ukraine, which is lasting longer than anticipated, and the impact of covid on China.

Their lockdown philosophy is having a huge impact on production. The logic behind raising interest rates is this: if they go up in a high inflationary cycle - such as the one the world is in - the cost of borrowing money also goes up as a result.

Then everybody - both consumers and businesses - have less money to spend, and demand for goods and services slows down. As a result of a reduction in demand, economic growth slows down. As that happens, prices should fall to encourage people to spend more money again.

If I have a fixed rate, what should I do?

Mortgage specialist Michael Dowling, of Dowling Financial, says that while people cannot really cushion themselves against the inflationary impact of many goods, they can protect themselves against future interest rate hikes. If ever there was a good time to switch to a long-term fixed interest mortgage, it is now, he believes.

“You’ll not only have peace of mind in these uncertain times, but you’ll also save yourself a small fortune,” he said. 

"People still have time as it takes about eight weeks to switch to another provider."

He also points out that you can still get a 30-year fixed-rate mortgage at 2.5% where the loan-to-value ratio is 60% or less, and a 30-year fixed-rate mortgage at 2.95% where the loan-to-value ratio is 90% or less.

If I have a variable rate, should I fix?

Mr Dowling said: “I would make the case for all borrowers, even people with trackers, to switch to long-term fixed rates. To be clear, by long term, I mean a fixed loan of a minimum of 10 years and up to 30 years.” 

For how long?

Mr Dowling warns: borrowers have a short window to act.

“At the moment, almost all 10- to 30-year fixed rates, depending on loan-to-value ratios, are currently under 3%,” he said.

“Borrowers have a short window to act but the savings will likely be worthwhile.

What if I have a tracker mortgage?

If you have a tracker rate of less than 1%, Mr Dowling advises sticking to it.

But if your rate is over 1.75%, he would advise getting advice and would encourage switching to a longer-term fixed mortgage.

Is it better to shop around and switch my mortgage?

You should always talk to your own bank and look at what options they have available, but if they are not competitive, then you should consider switching to another provider.

Will this make it harder for me to get a mortgage?

It will. Higher interest rates make for higher monthly repayments, which means your borrowing capacity will be reduced when you seek a mortgage. You’ll get a mortgage but it might mean your borrowing capacity will be reduced. You may not be able to qualify for the amount you could get today, compared to what you would get when the rates go up in July or later in the year.

How do I get the best advice?

Get advice from a regulated and authorised mortgage broker listed on the Central Bank website.