Mortgage holders face more bad news this week as the European Central Bank is set to increase interest rates by another quarter of a percentage point. ECB rates have already gone up by a hefty four percentage points since last summer, the fastest pace of increase in the central bank’s history. Most exposed are those on tracker interest rates, which increase in lock-step with ECB interest rates, and some borrowers on variable rate contracts with non-bank lenders.
A key focus for these groups will be on whether the ECB plans yet another rise in the autumn. There is a strong case for the central bank waiting to assess the impact of the increases put in place so far before moving further. However, those on the central bank’s governing council in favour of a hawkish approach now hold sway.
The unprecedented nature of the current inflationary surge means there is no “right” answer for central bank policy, with the US Federal Board wrestling with the same problem as the ECB of lingering inflation and signs of economic slowdown.
The Government here needs to be cautious in measures to help. It has certainly been correct to try to put pressure on investment funds not to increase interest rates too significantly on loans they bought at a heavy discount from Irish lenders. A group of borrowers, many previously in arrears, have been caught here and will realise that official promises that their loans would have the same protection as they did with the original lender do not now count for very much.
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Helping the wider body of mortgage holders is more difficult. Reinstating mortgage interest tax relief, as suggested by Sinn Féin on a limited basis, is costly and despite intentions that it would be temporary could quickly become semi-permanent. More targeted supports are hard to design.
Recent ESRI research suggested that among those worst affected are likely to be some who took out mortgages at the height of the property bubble before 2008. Certainly these people should get leeway from their banks, but designing wider State financial supports would not be easy.