New homeowners will frequently feel overwhelmed by the magnitude of the six-figure sum they owe their lender, but the low interest rates that prevailed during 2003 will have made their monthly repayments seem less intimidating, writes Laura Slattery

On the other hand, cautious savers who missed out on the Special Savings Incentive Account (SSIA) one-time deal and didn't want to play with the stock market will have been frustrated by the minimal or non-existent interest rates on deposits.

The bad news for homeowners and the good news for deposit holders is that interest rates are expected to rise this year.

A recent bulletin from Bank of Ireland's economic research unit forecast that the current European Central Bank (ECB) interest rate of 2 per cent - the cost of borrowing for the banks - represents the bottom of the cycle.

The ECB governing council met yesterday and decided to RAISE/CUT RATES / NOT TO DO ANYTHING FOR THE MOMENT...

If interest rates do eventually rise in 2004 the effect will be to make homeowners' wallets more slimline, rather than bulging at the seams.

Take the example of a financially savvy householder who is already benefiting from the lowest variable rate in the market, Ulster Bank's Flexible Mortgage, which has a rate of 3.15 per cent for loans amounting to 60-92 per cent of the purchase price.

This mortgage product is a tracker mortgage, meaning Ulster Bank guarantees to keep the interest rate at a fixed margin over the ECB rate.

This means any cuts in the ECB rate will be passed on to customers promptly, while homeowners on a standard variable rate may be left hanging, but it also means that any rate increases are guaranteed to be passed on too.

Monthly repayments on a €200,000 loan over a term of 25 years at a rate of 3.15 per cent will pinch the homeowner's pockets to the value of €964.

An increase of 0.25 of a percentage point in the ECB rate this year would mean the Ulster Bank Flexible Mortgage rate for this type of loan would rise to 3.4 per cent. Monthly repayments for the homeowner would increase to €990. A half a percentage point rise in the ECB rate would result in a €53 jump in the monthly repayment, which would stand at €1,017.

At the other end of the scale, a homeowner with a €200,000 loan over 25 years who is on the least competitive standard variable rate - 3.6 per cent at Bank of Ireland - must repay €1,012 each month, even before the banks start to tamper with interest rates. Provided Bank of Ireland passed on ECB rate increases in full to the customer, these repayments would increase to €1,039 and €1,067 in the event of a 0.25 or 0.5 of a percentage point rise in rates respectively.

For established homeowners who have long since hoovered up the last of the plastic packaging baubles and stopped breathing in toxic paint fumes, the prospect of these mortgage repayments shouldn't be too scary - after all, most variable rates exceeded 4 per cent this time last year.

But for new homeowners, paying their lender an extra €50 in mortgage interest each month is likely to put a serious dent in the housewarming party fund as well as family finances going forward.

In theory, any interest rate increases shouldn't place mortgage holders in any real financial danger.

Guidelines monitored by the Irish Financial Services Regulatory Authority (IFSRA) request that lending institutions "stress test" the future ability of borrowers to repay a loan by checking that they could afford to repay at 2 percentage points over the standard variable rate.

IFSRA believes that the lower the interest rate, the greater the risk that increases could stretch homeowners beyond their limits, so the regulator has recently announced a round of stress-testing exercises on lenders.

It has also signalled that it will require lenders to tighten up how they verify borrowers' incomes and check how they are funding the deposits on their property. Savers, including frustrated tenants putting aside money for their deposit, should benefit from any rise in interest rates this year.

At the moment, the rates on deposit accounts are paltry at best, failing to keep up with average inflation rates and thus eroding the value of the money in real terms.

Meanwhile, the interest rates banks charge on overdrafts, personal loans and credit cards are under investigation by IFSRA.

The regulator is preparing a study on the passing on of ECB rate cuts to consumers.

Political pressure may have prompted mortgage rate cuts, but it is feared that borrowing smaller sums of money is still as expensive as ever.

IFSRA figures show that the banks' interest fee on these products - the margin above the ECB rate - has increased steadily since 2001, when the ECB rate was as high as 4.75 per cent.

The results of the study will be released and handed over to the Competition Authority in the coming months.

A second spotlight on the interest rates charged to borrowers and paid to savers in the Republic is being shone by the ECB itself. Its first monthly comparison of interest rates revealed that Irish consumers pay a higher rate of interest on overdrafts and earn a lower rate of interest on deposits than customers of financial institutions elsewhere in the euro zone.

While overdraft rates for business decreased in line with ECB rates between January and September, household overdrafts remained broadly unchanged.

Irish people were getting a broadly competitive deal on mortgages and short-term consumption loans, the ECB found.

However, the average rate on consumer loans was dragged down by the comparatively high volume of borrowing in Ireland that is secured against property and thus charged at the lower home loan rates.

The ECB's second euro-area interest rate comparison is due to be released next week.

If interest rates do rise during 2004, it is likely that consumers will keep a closer eye on whether or not they are being ripped off compared to their European counterparts.