Homeowners will see their monthly mortgage repayments drop further from early in the new year, but the latest fall in interest rates spells bad news for savers. Financial institutions have also indicated that the falls could pose a stiff challenge, as they will find their profit margins on their core savings and lending businesses under extreme pressure.
The State's biggest mortgage lender, Irish Permanent, yesterday followed the Central Bank lead, announcing a 0.5 percentage point cut in its variable home loan rates to 5.5 per cent. The new lower rate will come into effect from January 1st. Its discounted mortgage rate for new customers will also decline, moving to 5 per cent from December 11th.
The rate cut will mean monthly savings of £14.27 on a £50,000 mortgage, rising to £22 on a £80,000 mortgage and follows the bigger-than-expected reduction in Central Bank rates yesterday. Other lending rates will also be reduced and the other financial institutions are set to follow Irish Permanent's lead.
The new reductions will be the third successive cut in Irish retail interest rates in as many months. Yesterday, the Central Bank cut its key interest rate, its repurchase or "repo" rate, from 3.69 per cent to 3 per cent. It has now cut this rate by 3.2 per cent since October in preparation for Ireland's participation in European Monetary Union.
For Irish Permanent mortgage holders, the latest 0.5 point decline brings to two percentage points the total reduction in mortgage rates which has been passed on since October in response to the official rate cuts, yielding a total saving of £59 a month on a £50,000 mortgage. Other institutions are expected to reduce their rates by a similar amount.
The scale of the latest rate reduction was bigger than expected - due to the fall in the French and German base interest rates - and took the financial institutions by surprise. Central Bank base interest rates had been expected to fall to around 3.3 per cent before the end of the year and, while some of the banks and building societies were prepared to reduce interest rates from next week, none expected to have to make such a sizeable adjustment this time around.
Irish Permanent head of marketing Ms Barbara Patton said the bank believed variable mortgage rates would settle at 5.5 per cent for some time and it would also be shortly announcing new rates for savers.
The institutions have so far failed to pass on the full impact of the Central Bank rate reductions to borrowers in an effort to keep savings rates as high as possible for depositors.
Mr Martin Walsh, head of lending at EBS Building Society, said it was still assessing the rate cut but it would undoubtedly mean that borrowers were getting very good value. "Institutions must also look after savers. It will be a very difficult balancing act," he warned.
Demand deposit rates are likely to be cut further in the wake of the Central Bank move. Currently these account holders are earning a rate of interest of between 0.2 and 0.4 of a percentage point and could soon see this drop to as low as 0.1 of a percentage point. At these levels the returns for savers and the profit margin on this type of business for the financial institutions is extremely small and could bring pressure for a handling charge for deposits to be introduced.
All financial institutions are continuing to play down any suggestion that such a charge is under consideration and are reluctant to do anything to upset the deposit base in the current low interest rate environment.
The Irish Permanent has set the benchmark for further rate cuts among its rivals. But as this reduction is seen as the last in the run-up to EMU, some may decide to use it as a way to set themselves apart from the rest of the competition by introducing a cut of more than 0.5 of a percentage point. Similarly, others may cut their rates by less than the Irish Permanent in an attempt to protect profit margins.
