This autumn, homeowners in Ireland with tracker mortgages are likely to enjoy a bonus reduction of 0.35 percentage points on their loan interest rates. This development comes as a result of the European Central Bank’s (ECB) reconsideration of the discrepancy among its different policy rates.
At present, the ECB identifies its main interest rate as the deposit rate, the rate it offers to banks for their deposits. This rate, currently set at 4%, is expected to decrease throughout the year.
However, the marker for determining tracker mortgage rates is another ECB interest rate, known as the refinancing rate. Historically, the refinancing rate has been 0.5 percentage point higher than the deposit rate, and is currently at 4.5%. This discrepancy places usual tracker loan interest rates ranging between 4.6% and 5%. In the State, there are 180,000 homeowners with tracker mortgages.
In a reassessment of its “operational framework,” the ECB revealed it will diminish the gap between two rates (the deposit and the refinancing) from the current 0.5 percentage point to 0.15. The decision will come into effect from September 2024. The ECB’s assurance that the deposit rate will remain its primary interest rate could in turn draw the refinancing rate closer come the above-mentioned month.
The narrowed margin indicates a reduction in repayments for most tracker mortgage holders, who typically see their borrowing rates fluctuating in tandem with the refinancing rate.
Economist Simon Barry affirms that the ECB’s decision to modify the gap among its multiple interest rates is not uncommon, as similar decisions have been made in relation to changing economic climates. This decision implies another instance where tracker mortgage holders are set to benefit—first from the run-up to the financial crash when the gap decreased, and now, with the probable adjustment of the ECB’s policy stance.
Especially since mid-2022, tracker mortgage holders—who experienced the largest rate increases correlating with the ECB’s rise—are positioned to be the earliest beneficiaries of the common decrease in interest rates, due to their contracts being explicitly linked to ECB motions.
The initial decrease in ECB rates is anticipated within the upcoming months, most likely in June. This, coupled with the subsequent reduction of the gap between the two main ECB rates, indicates a potential additional reduction for these mortgage holders by autumn.
The decrease in their monthly repayments is expected to be around €15 to €20 on a €100,000 loan, this being attributed to a 0.35 point drop. Yet, the aggregate reduction in repayments is projected to exceed this modest sum as rumours persist that the ECB might lower rates multiple times in the forthcoming months.
With tracker rates potentially falling by one percentage point by winter, there could be a monthly saving of approximately €60 for a typical tracker holding a balance of €100,000 on their mortgage. Including any bonus cuts, the total savings may surpass this figure.