The State's biggest mortgage lender, Irish Life & Permanent, has raised its variable mortgage rate, becoming the first financial institution to react to last week's increase in the European Central Bank (ECB) base rate.
IL&P, which controls almost a quarter of the market for new mortgages in the Republic, increased its variable rate to 4.39 per cent, a jump of 0.4 of a percentage point. This means the bank has not fully passed on the 0.5 per cent ECB hike. However, it leaves IL&P with a margin of 1.4 percentage points over the ECB rate.
"The new rate takes effect immediately," IL&P said in a statement. "For existing borrowers, the new rate will apply to any repayments due after December 1st."
The other financial institutions would not comment on the move by IL&P, with most saying that they were "monitoring" the market. Usually, IL&P is the first to move its rates - either up or down - after a change by the monetary authorities. The other banks tend to follow within a few days and the main lenders are likely to move by the end of the week, announcing broadly similar increases.
There has been speculation that some Irish lending institutions will choose to absorb some or all of the rate increase. In some other countries, banks take a profit of around 1 percentage point; with the ECB base rate now at 3 per cent, such a level of profit would allow an Irish bank to offer loans at 4 per cent.
Bank of Scotland's entry to the Irish market two months ago forced all of the domestically-run institutions to belatedly pass on the previous ECB rate cut to their customers. Last month, the Scottish lender further reduced its variable rate, and promised never to charge more than 1.5 percentage points more than the ECB base rate. In Britain, Bank of Scotland offers a variable rate just 0.9 percentage points above the Bank of England base rate.
For the average borrower, the IL&P rate rise will mean extra monthly repayments of less than £20 (€25). For example, a customer with a loan of £80,000 over 20 years used to pay around £484 a month; he or she will now pay £501 a month.
But economists say this latest rate rise by the ECB may not be the last. Recent data indicate the German and Italian economies are clearly moving out of their doldrums, with France already well on the road to recovery.
