Further ECB interest rate increase will heap pressure on borrowers

The increase in the European Central Bank’s interest rates to their highest level in more than 20 years will heap pressure on tens of thousands of borrowers, with more financial pain coming as ECB president Christine Lagarde all but confirmed another rate hike next month.

“It is very likely the case that we will continue to increase rates in July,” she said, barring any significant dip in inflation.

The impact of the ECB’s decision to increase its main lending rate, off which tracker mortgages are priced, to 4 per cent from 3.75 per cent will be felt immediately by about 170,000 tracker mortgage holders.

It will add an extra €26 a month to a €200,000 mortgage on a 1.25 per cent tracker rate and take monthly repayments to almost €400 more in July when compared with 12 months ago.

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[ Christine Lagarde: After years of being too low, inflation is now too high and is set to remain so ]

Spread over the course of a year, many tracker mortgage holders are worse off by close €5,000, an after-tax figure so the most negatively impacted will need to earn around €10,000 just to plug the financial hole caused by the unprecedented series of rate increases.

However the financial pain will not be confined to tracker mortgage holders with financial analysts warning that increases in variable rates are coming and first-time buyers and switchers, as well as hundreds of thousands of borrowers set to come off low fixed rates over the next three years, are also likely to feel the financial pain.

Rachel McGovern of Brokers Ireland said borrowers exiting fixed rates in the near future “will be coming out into a challenging higher interest rate market at a level they would never have anticipated”.

She expressed concern about the ECB’s policy and the likelihood of further hikes. “The rationale for the rapidity and aggressive nature of the increases remains a key and worrying question.”

Daragh Cassidy of price comparison and switching website bonkers.ie said that while the rate increase was “well flagged” it did not “ease the burden on those impacted”.

He said that although the immediate impact would be on tracker mortgage holders, borrowers on variable rates “are also likely to see a hike in their repayments soon”.

He noted that the main banks in Ireland “have been slow at passing on the recent ECB rate hikes to their variable-rate customers – partly because these rates were so high to begin with” but said that this was “unlikely to last” now that rates are at 4 per cent.

He suggested that variable-rate customers at all the main banks “could see a 0.25 percentage point increase to their mortgage rate or slightly more over the coming weeks”.

He warned people due to come off fixed rates within the next two years “to start budgeting for higher repayments. This is because the rate they’re paying now is likely to be a lot lower than the rate they’ll get when they come to re-fix”.

He said anyone who took out a fixed rate over the past three or four years will likely be paying a rate of 2-3.5 per cent. “However most fixed rates are now between 3.5 per cent and 5 per cent – and are likely to go higher after today’s announcement.”

New borrowers will not be spared the impact of the rate hikes. “I expect all the main lenders to hike their rates for new borrowers over the coming two or three weeks. By the end of the year, the cheapest rate on the market is likely to be close to 5.5 per cent compared to just 1.9 per cent this time last year.”

Mr Cassidy said that while a pause in rate increase might happen this autumn, the ECB was likely to leave rates unchanged for many months. “Rates may only begin to fall slightly in early 2025,” he said.