Banks may hold off on ECB rate cut

THOUSANDS of borrowers may be kept dangling by the banks after the European Central Bank cut interest rates by 0.25% yesterday.

Bank of Ireland is to pass just 0.15% of the cut on to its mortgage holders, it has announced.

IIB has been the only lender so far to respond fully to the change. The cut of 0.25% will save its customers €14 per month on repayments on a €100,000 mortgage over 20 years.

Despite record profits announced recently by AIB, First Active and Irish Life & Permanent, all three said they were reviewing the situation and were in no rush to cut rates immediately.

However, fears that the majority of lenders would not cut rates look unfounded given the response from Bank of Ireland and IIB.

It was suggested most might wait until the ECB cuts rates again, which it is expected to do in the months ahead, before they move on mortgage rates.

Peter Bastable, managing director of Simply Mortgages, said: "It has become a question of market share for the major players."

In a competitive market, the rest will follow to ensure there "is no slippage in their market position", he said.

In a novel twist to the rate saga, Mr Bastable's Dublin-based financial services group advised young borrowers to maintain their repayments at existing levels and ignore the lower rates as they come through.

Such action could save them €10,500 in interest payments over the life of a €150,000 mortgage spread over 25 years.

With house prices slowing, first-time buyers might need to consider this approach more than others, he said.

He added: "There is evidence out there that young couples are ringing their banks instructing them to keep their payments at existing levels." This means the levels of debt will fall while significant savings on interest payments will also be made.

Most young couples do not know how much interest they pay "but there is evidence that an education process is beginning to get underway", said Mr Bastable.

The rise in hose prices is slowing quite dramatically, which means young couples will have less equity built up in a few years when they move up the housing ladder than before, he said.

The surest way of ensuring they will be positioned to trade up is to keep paying off as much as they can of their existing mortgage, he said.

With prices slowing, the housing ladder will become more difficult if couples are relying on the value of their asset to give them the leverage to buy a better home.

Keeping repayments high will save on interest and reduce the amount borrowed faster, he said.

At a time when house prices are going up in value at a much slower rate 7% per annum as opposed to 20% up to recently the individual's ability to take on more debt will be crucial in a few years, he said.

The ECB's decision to cut rates by just 0.25% when most had been expected a 0.5% change has disappointed the markets.

Niall Dunne of Ulster Bank Markets was one of the few to suggest the ECB would cut by 0.25% in order to allow further leeway following a war on Iraq.

However, ECB president Wim Duisenberg made it clear yesterday that the bank will cut further if necessary.

Austin Hughes says another 0.25% can be expected by the end of June at the latest.