If interest rates start rising, homeowners with variable rate mortgages are set to see even more of their hard-earned cash go on repayments, writes Una McCaffrey

Irish homeowners have never had it so good - their houses are worth more than anywhere else in the EU and it is cheaper than ever before to hold a mortgage.

Hurrah for all of us, you might say - or at least for all of us who managed to get into the property game before prices began to take off a decade or so ago.

The remainder of the population - those who got in late or have yet to enter at all - might be justified in being a touch less delighted with the situation.

Although they might still, in theory, benefit from low mortgage rates, the practicalities of the cheap finance boon will have gone unappreciated as the price of buying a house spiralled out of their reach.

After all, what good is a cheap loan if you can't manage to qualify for it in the first place?

The bad news for those in the latter category, not to mention mortgage holders on variable-rate loans, is that cheap mortgages are about to get more expensive, at least if economists' expectations on interest rates come true over the next year.

The consensus in the market at the moment (if there is ever true consensus) is that interest rates around the world are at the bottom of a curve and are on the point of turning upwards again.

The rough expectation is that rates in Britain will start the new trend over the next couple of months, followed by the US before the end of the year, with the European Central Bank (ECB) finally following suit in early 2005. This would almost certainly be followed by Irish banks passing on a rate increase to borrowers, just as they might be expected to pass on a reduction.

And as the Central Bank and Financial Services Authority of Ireland pointed out in its Spring Bulletin last week, any upswing in rates would be felt particularly in the Republic, where some 70 per cent of mortgages are held on variable rates. This compares to about 14 per cent in France, 7 per cent in the Netherlands and just 6 per cent in Belgium.

According to the Central Bank's analysis, the large proportion of variable loans is "the sting in the tail" in an otherwise relatively secure credit picture in the Republic. The theory is that, if our monthly loan repayments rise along with interest rates, our normal spending patterns will be dampened and the economy will suffer since so much of our monthly income goes on paying back debt (see Walking the mortgage tightrope below).

Before we get too excited and hightail it out of the property market, it is worth putting the likelihood of an interest rate increase into context.

The first and arguably most important thing to remember is that euro-zone interest rates (at 2 per cent) are so low than even an increase of, for example, half a percentage point, would not be enough to make them high again.

And given that the ECB is not known for rash measures, chances are that we will have lots of time to get used to the idea of higher repayments before they actually come along.

The timing of the nasty day is also still a very moot point, with judgments on the likely date of an interest rate increase varying according to commentators' views on the wider economy.

This is because, in very simple terms, rates should only be raised when the economy is improving and consumers and businesses no longer need a particular incentive to borrow. To do the opposite would not make sense since it would automatically make people reluctant to borrow and stifle the spending that is needed to get the economy going.

Economists at NCB Stockbrokers say the latter point forms the basis of the problem that faces the ECB as it mulls a rate increase over coming months. They are expecting the bank to stick with 2 per cent for "the balance of the year" but say this could last even longer if weak spending patterns in core EU member-states such as Germany, Belgium and the Netherlands do not register a serious improvement soon.

Indeed, according to NCB, the very fact that "will they, won't they raise rates" discussions are being held means there is still a good chance that they will not.

Economists at AIB are similarly circumspect, remarking that "an ECB rate cut cannot be ruled out in the coming months", but adding that the Frankfurt-based authority is more likely to keep things as they are for a while yet.Again, however, the conviction is that the cycle has turned along with the economy.

Respected think-tank the Economic and Social Research Institute is of the same belief, predicting that the key euro-zone rate will average at 2.5 per cent next year, up from 2 per cent this year. On a variable-rate 25-year mortgage of €300,000 that currently applies a 3.3 per cent rate, this would probably mean monthly repayments would rise from about €1,425 to €1,500.

While probably not a bank-breaking matter, it would hardly be welcomed by already cash-strapped borrowers, regardless of the economic justification.