The decision by AIB to increase the interest rate on its new fixed rate mortgages ended a standoff among Ireland’s major banks. It was only a matter of time, following two European Central Bank (ECB) interest rate rises, before the big players upped the cost of new lending. AIB’s rise will be followed by Bank of Ireland and Permanent TSB. It seems inevitable that before long the big lenders will also increase their standard variable mortgage rates; tracker mortgage rates have already increased as they are tied directly to ECB rates.
With rates charged by smaller lenders already on the rise, a general upward move in borrowing costs is now underway. Irish mortgage rates have been amongst the highest in the euro zone, so the scale of increases here should be a bit less than elsewhere. But more rate rises on top of the current round are due before long, with another hefty ECB increase looking inevitable in December and more signalled for 2023.
The scale and pace of interest rate increases now in prospect will prove challenging for many borrowers. The ECB, in common with other central banks, is moving quickly to try to control inflation, having underestimated the scale of the problem earlier in the year. This means the pace of interest rate increases is rapid – and follows a prolonged period of very low borrowing costs. Indeed there is a danger that, with the euro zone economy at risk of recession, the ECB could move too far, too fast in pushing up rates.
Not all borrowers face increases. The majority of those who took out new mortgages in recent years are on fixed rates and will not be immediately affected. However when their fixed rate terms end they too will face into a changed market.
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As well as household finances, higher interest rates are bound to have an impact on the housing market, though with a chronic shortage of supply the trend in house prices remains uncertain. The wider economy will also be affected, as households face another squeeze on their income, in addition to soaring energy bills. The era of super-low interest rates is now well and truly over.