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ECB rate cut: what does it mean for tracker mortgage holders and variable rate mortgage holders?

Borrowers on variable rates and those coming off fixed rates or looking for a new mortgage may have to wait for any benefit

Markets are expecting another 0.25% cut before Christmas. Photograph: Kirill Kudryavtsev/AFP via Getty Images
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Conor Pope
Thu Sept 12 2024 - 13:43

Tracker mortgage holders will immediately benefit from the 0.25 percentage-point cut in interest rates announced by the European Central Bank (ECB) this afternoon.

They will also benefit from a 0.35 percentage-point cut as the ECB moves to cut the gap between its main refinancing operations rate and its deposit rate.

However, borrowers on variable rates and those coming off fixed rates or looking for a new mortgage may have to wait some time to see any benefit, industry analysts have said.

The rate cut will see tracker mortgage holders’ repayments fall by about €13 per month for every €100,000 still owed with the rate reductions automatically passed on by lenders within 30 days.

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A borrower with an outstanding loan of €250,000 over a repayment period of 15 years is likely to see the cost of their mortgage fall by around €33 a month.

A second larger rate cut affecting tracker mortgage holders will lead to even bigger savings.

As a result of an “operational framework review” carried out by the ECB in March, it is cutting the spread between the bank’s refinancing and deposit rates to 0.15 per cent from 0.5 per cent.

That will see the refinancing rate, on which tracker mortgages are based, fall by 0.35 per cent this month.

When the potential 0.25 per cent cut is added to the 0.35 per cent rate cut, the savings per €100,000 owed on a tracker with 15 years left to pay is €31 which will see a homeowner with a mortgage debt of €250,000 better off by €77 or €924 a year.

While the savings are likely to be welcomed by tracker holders, the cohort are still paying considerably more than they were just over two years ago and even when the two cuts likely to be rolled out this month are added to a 0.25 per cent cut last June, monthly mortgage repayments will be around €400 more than they were in 2022.

“Today’s rate cut was pretty much expected by the ECB. And it’s likely to reduce rates at least one more time before the end of the year as inflation continues to ease,” said Daragh Cassidy of switching and comparison website bonkers.ie

He said the move would “also put further downward pressure on variable and fixed rates. We may not see any reductions immediately. But we’re almost guaranteed to see some rate cuts from the main banks here over the coming weeks.”

Mark Coan of financial services company moneysherpa.ie said that while the rate hikes over the last two years were a “whirlwind” the decreases are likely to be much slower and unlikely to return to the 0 per cent rates experienced before 2022.

He said markets were expecting another 0.25 per cent before Christmas with rates likely to level out at around 2.5 per cent by the end of 2025.

“This means mortgage rates are set to come down for buyers and existing mortgage holders, but maybe not as much as they hoped,” he said.

“Home buyers are unlikely to see much change in fixed rates in 2024 as both this rate cut and the one in December has already been mostly priced in by lenders. If the ECB does cut rates to 2.5 per cent by 2026 fixed rates would be likely to fall from around 4 per cent today to more like 3 per cent, though with rising house prices you would probably still lose out overall by waiting for lower rates.”

Mr Coan said that variable rate customers and those coming off fixed rates on to variable “are unlikely to see much relief as lenders passed on little of the rate rises in the first place. This is likely to make switching even more attractive as fixed rates fall across 2025.”

Mr Cassidy also said falling interest rates also led to some people losing out. “Savers are likely to start seeing their rates fall. And annuity rates will fall making it harder to fund your retirement in some cases,” he said.

He noted that N26, the German online-only bank, has “slashed its savings rates by up to 1.1 percentage points. And it’s likely we’ll see reductions from other providers before the end of the year. However, strong competition for savers’ money, both from banks in Ireland and abroad, might keep rates a bit higher than expected.”

He added that Irish households have over €150 billion resting on deposit with “the vast majority of the money still in accounts that pay little to no interest. So I’d really encourage people with savings to lock into the higher rates while they’re still available.”