Interest rates: Pain for homeowners and first-time buyers as rises push up mortgage payments

The decision by the European Central Bank (ECB) to raise its interest rates to the highest level since the launch of the euro will cause financial hardship to Irish homeowners and would-be homeowners and push more people into mortgage arrears, it has been warned.

The 10th consecutive rate rise since last summer will see the bank’s main lending rate climb from 4.25 per cent to 4.5 per cent and immediately add around €25 on to the monthly repayments of a typical tracker mortgage holder. It came with a warning from ECB president Christine Lagarde that that while rates may have reached a peak, there is no prospect of a reversal of its aggressive monetary policy aimed at bringing inflation across the eurozone under control.

“With today’s decision, we have made sufficient contributions, under the current assessment, to returning inflation to target in a timely manner,” Ms Lagarde told reporters. “The focus is probably going to move a bit more to the duration, but it is not to say – because we can’t say – that now that we are at peak.”

She stressed that the prospect of a future cut in borrowing costs “was not even a word that we have pronounced”.

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Ms Lagarde welcomed the decline in inflation across the eurozone and stressed that the ECB wants it “to continue to decline”.

[ Analysis: ECB interest rate increases probably at their peak ]

She made it clear it was pursuing its current monetary policy “not because we want to force a recession, but because we want price stability.” She said the economy will stay “subdued” in coming month adding that “we are clearly in a period of slow and sluggish growth. The difficult times are now.”

The effect of the 10 rate increases from the ECB on Irish mortgage holders will very much depend on the size and duration of a home loan although many with even modest debt levels are facing monthly repayments that have climbed by over €400 since July of last year.

It is not just tracker mortgage holders – whose repayments are directly linked to ECB rates – that have been impacted with variable rate holders, those with fixed-rate mortgages coming to the end of agreed terms, first-time buyers and people with loans controlled by mortgage service providers also having to confront an expensive new reality.

According to Mark Coan, financial advisor and founder of moneysherpa.ie, variable rates could climb to more than 6 per cent adding around €160 a month to the average variable rate borrower while people coming off fixed rates might see “a jump of over €400 a month”.

[ AIB offers four-month moratorium on rate rises over tracker mortgage error ]

Joey Sheahan of online brokers mymortgages.ie noted that higher interest rates have seen the amount of demonstrated repayment capacity banks want to see from new borrowers increase by as much as €600 monthly for a €300,000 mortgage with banks wanting “to see mortgage applicants save a whole lot more each month”.

According to Ronan Brennan of Delta Capita “the impact of ongoing and sustained loan interest rate rises” will “really challenge those customers already struggling with existing arrears or who have previously been in arrears. Customers who have fallen behind on their mortgage repayments in the past could therefore now fall back into arrears despite having managed to resume making repayments in recent years and so banks could see a reverse in the progress made on some reperforming loans.”