The complexity of managing personal finance often increases during transitional periods, especially regarding mortgage rates. The European Central Bank (ECB) made clear in their March meeting on Thursday that their base rates would remain unchanged for the time being, leading to discussions about their exact plans. However, with decreasing inflation and peaked interest rates, it is expected that a downhill trend will begin sometime this year.
First-time purchasers and those in the process of moving houses might question their next steps, but unfortunately, there is no cut-and-dry solution. It is recommended that borrowers try to filter out distractions and speculations about the exact timing of interest rate reductions, concentrating instead on the probable outcomes.
The timing of an ECB interest rate reduction has been a hot topic of debate throughout the year – with March, April, and June being the possible months for a cut. While these exact dates may have significance for financial market movers, for the general public seeking mortgage loans, these changes are part of a bigger economic game plan. Economist Simon Barry emphasises that initial hopeful presumptions of a 1.5 point or more fall in the ECB interest rates have been withdrawn due to the ECB’s caution about prospective inflation in the service sector and salary trends.
Regardless, the inflation in the Eurozone has noticeably decreased, with February estimates at 2.6%, and it’s widely accepted that the interest rates are set to decline this year. The predicted months for the start of reductions are either April or June. Considering warnings from selected ECB board members, Barry predicts June to be more probable. This is likely the onset of a slow downward trend in rates for the remainder of 2024 and into 2025. The reductions are typically around a quarter percentage point, making a quarter point decrease in June a likely first step. Further into the future, larger half point reductions could be triggered by weak economic data.
Throughout the remainder of 2024 and into 2025, uncertainty has been brewing over the tug of war between market expectations and the European Central Bank (ECB). The trajectory of the market interest rates currently indicates a potential cut of just over 0.75 points by the year’s end. The top executives of Allied Irish Banks (AIB) and Bank of Ireland have suggested that the slash could be deeper, possibly as much as 1.25 percentage points. Such a cut could reduce the ECB’s existing deposit rate from 4 per cent to 2.75 per cent.
The anticipation is that interest rates will continue their descent into the next year. However, the scale of this drop remains a point of contention. Barry commented on the rigid policy posture represented by the ECB’s current interest rates. He stated that even with a reduction from current levels, these rates would keep serving as a deflationary tool until reaching significantly lower levels. Given the diminishing inflation heat and the Eurozone’s continued weak economic growth, the justification for maintaining such an inflexible policy stance is being scrutinized, according to Barry. Economists argue over the neutrality of interest rates – a rate that neither propels nor inhibits the economy. The ECB deposit rate might drop to about 2 per cent in course of time.
The prospect of the rate returning to the negative 0.5 per cent, its position prior to the hikes initiated in summer 2022, is slim barring a major new economic recession. It is expected that future mortgages will be less costly than currently but will be more expensive than the period between the financial crash and pandemic.
Borrowers in Ireland are faced with a conundrum. They have grown accustomed to fixing their mortgage rates in the past few years. Attractive guarantees for three and five years, many between 2.5 per cent and 2.75 per cent, were available until the rise of interest rates. These deals offered borrowers minimal risk due to the very low existing rates. Although banks experienced a margin squeeze during the period of slashed interest rates, their substantial savings deposits gave them the necessary support for these loans, especially when they offered little to no interest on these deposits.
Currently, the prognosis seems to have altered, with ECB interest rates reaching their zenith and now commencing the descent. This decrease might be more prolonged than several borrowers anticipated, but remains an inevitable event. The primary hazard thus becomes the potential commitment to an elevated interest rate that endures for an extended period.
Even when ECB interest rates commence their fall, predicting the specific trajectory of fixed rates remains challenging. Mortgage broker Michael Dowling highlighted an interesting detail: a rise of 4.5 percentage points in ECB rates has been accompanied by only a 1.75% to 2% increase in banks’ fixed rates. Consequently, as ECB rates decline, banks’ fixed rates will follow suit, although at a more gradual pace. Regardless, they will eventually decrease at some point.
Broker John Fahy of Pangea Mortgages predicts a possible reduction of approximately 0.5 points in the rates offered to borrowers over time. As of now, the market’s most attractive fixed rates are green rates offered by lenders like AIB, Haven, and EBS. These range from 3.65% to 3.75% for a period of four to five years. Fahy, however, does not foresee rates dropping below 3%. Certain low rates might also appeal to those with low loan-to-value ratings (LTVs) below 60%, possibly benefitting those carrying some equity forward from a previous house purchase.
These reduced green mortgage rates should be accessible to a large number of borrowers purchasing new homes with superior BER (energy) ratings. When considering potential fixed over the following years, these rates seem reasonable, even though there exists the likelihood of a slight fall in the coming months.
Nevertheless, for those who are ineligible for green rates and possess normal LTV levels of 80% or more, the typically available fixed rates tend to exceed 4.5%. Several major lenders exhibit fixed rates for three and five years at roughly 4.75%, with some even surpassing 5%. In light of the impending decline in interest rates – and considering the existing lower rates of approximately 4% from smaller lenders such as Avant – these seem to be exceptionally high rates to commit to.
Broker Michael Dowling suggests that clients in this circumstance might want to consider choosing a variable rate in the short run, with the idea of moving to a fixed rate later in the year or at the start of next year. He highlights the fact that there are no charges associated with transiting from a variable to a fixed rate. The variable rates fluctuate depending on the bank and the loan-to-value ratio, but they generally hover around 4 per cent currently. There are also fairly reasonably priced one-year fixed promotions available in the market for those who don’t want to take variable rates. Given the varying rates available, preferences of different buyers, and various terms and conditions for different loans, seeking expert advice is always recommended.
There isn’t one absolute solution in the current market. Yet there are hints of changing behaviours among borrowers. Barry notes that during the closing quarter of 2022, 89 per cent of new mortgage loans had a duration of three years or more. However, by the finale quarter of 2023, this dropped to 72 per cent with a noted increase in those choosing one year fixed products.
Prospective buyers could anticipate that market competition and potentially some political influence on leading banks will assist the declining trend in offers. Fahy indicates that non-banked lenders such as Finance Ireland may reappear in the game, boosting competition. There are signs of this from smaller companies like Avant, owned by Spain’s Bank Inter, who are making efforts to obtain greater market share through lower end rates.
4. Prospects: Looking at the overall scenario, interest rates that were primarily in the spectrum of 2 to 3 per cent have now shifted to a band of 4 to 5 per cent. However, as we step into 2025, we can anticipate a decrease back to the intermediary range – between 3 to 4 per cent, influenced by particular conditions. This has implications not only for new entrants but also for tracker holders and approximately 70,000 borrowers switching from fixed rates in the current year. Those who retained their trackers have faced a significant blow, but can expect some alleviation, although the recovery will be a slow process. Individuals switching from fixed rates, commonly below 3 per cent, are looking at an unavoidable increase. Similar to new entrants, they must be cautious not to commit to excessively high rates for extended periods in an environment where the rates might start to relax in the year’s latter half.