Most borrowers are going to see another increase in their monthly mortgage repayments over the coming weeks. In contrast to the situation last year, when borrowers waited months on occasion to see the benefit of a rate cut, the institutions will not be slow to pass on the latest rise.
The European Central Bank (ECB) is now firmly in rate-raising mode and variable rates below 3 per cent are probably gone for this economic cycle.
Most borrowers who are on a variable rate had repayment increases at the end of last year. However, AIB, Bank of Scotland and TSB and Superquinn's Tusa left rates below 4 per cent at that time.
However, with the further increase, none will be able to afford to do so again. After all, official interest rates are now 3.25 per cent and rates of around 3.7 per cent are simply not profitable in the long run at that level. On top of that, most analysts are expecting another rate rise in April bringing rates to 3.5 per cent. Either one or two rises are then expected before the end of the year as the European economies go on growing.
All of these increases will be passed on to some extent to borrowers.
According to Jim Power, chief economist at Bank of Ireland, interest rates will end the year at around 4 per cent. That could mean typical variable interest rates of around 5.4 per cent. On a £75,000 mortgage over 20 years, that would mean a £40 a month increase in repayments to around £410.
Last week's interest rate rise was as much to do with the weakness of the euro as it was to stem growth in the euro zone. The euro had been trading at record lows, well below the dollar - an interest rate increase would improve the rate of return for investors in the euro and would encourage more to buy. That would drive up the value of the euro and help curb import prices.
The other reason for the increase is that inflationary pressures have been building up. January's euro zone inflation figure is expected to come in around 2.1 per cent.
A rate increase making borrowing more expensive is also designed to cool down consumer spending - and hence price increases. Most economists believe that these pressures will continue to build this year and next, with a whole series of interest rates rises now due.
According to Mr Power, interest rates are likely to end 2001 at around 5 per cent, which would point to variable rates around 6.4 per cent. However, there certainly appears to be little possibility that interest rates will go as high as in previous economic cycles before the advent of the euro. The single currency means the cycle is likely to be substantially closer to the old German model than the old Irish or, indeed, Italian one.
Keeping rates and inflation low will be a priority and the ECB does not have to be too concerned about a run on the currency.
According to Mr Power, the maximum that rates are likely to go over the next few years is 6 per cent. That would translate to variable rates around 7.4 per cent. On a £75,000 loan, that would mean around £120 a month additional repayments.
Certainly, the good opportunities to fix have gone. Five-year fixed rates are now costing around 6.4 per cent, and that is likely to go up. This may be cheaper than the worst case envisaged but it is important to remember that that rate would be payable for five years from now. The higher rate, in contrast, is not likely to prevail for more than six months to a year.
