Data published by Eurostat, the European statistics agency, indicate that Ireland’s inflation rates have sunk below the European Central Bank’s (ECB) benchmark of 2 per cent. Over the last couple of years, we’ve witnessed European governments wrestle with burgeoning costs, and it’s been stated that until we hit this objective, we won’t be in a position to anticipate lower interest rates, amongst other things, offering some respite for numerous mortgage payers in Ireland.
Does this mean we can anticipate a reduction in the monthly cost of home loans, an escalating expense that along with increasing energy costs has been a significant contributor to the financial squeeze felt by many Irish households in recent times?
The answer seems uncertain, and there are a few factors contributing to this ambiguity.
First off, in the EU landscape, Ireland is not isolated; the ECB will be waiting for inflation rates throughout the euro zone to drop near to 2 per cent before initiating reductions that will resonate each participating country.
Even though Irish inflation might have dropped beneath the 2 per cent marker- to an initial estimate of 1.7 per cent- the overall euro zone rate remains at a solid 2.4 per cent and climbs as high as 4.9 per cent in Croatia and over 4 per cent in other member nations. Further complicating matters, whilst the overall euro zone figure has been decreasing, in some countries, the opposite is happening.
Sustainability is another crucial factor. Central bankers in Frankfurt aim to be assured that any reduction in inflation will endure. This has raised worries, particularly in regards to wage inflation.
Unusually, in discussions about mortgage interest rates, the distinction between the harmonised inflation figure and the consumer price index generated by our own Central Statistics Office is mortgage interest itself. This partially justifies why the Irish inflation, as per the Consumer Price Index in February (the latest month for which data is available), marked 3.4 per cent, whereas the harmonised index for the same month marked 2.3 per cent.
Despite the optimism, a reduction in interest rates may still take some time, with the earliest predicted decrease coming in June at the European Central Bank (ECB) meeting. However, this could potentially only be a decline of quarter point. The future timeline for further rate cuts remains vague, according to Martina Hennessy, the CEO of the online mortgage broker, Doddl.ie. Differing predictions from industry experts have only added to this uncertainty. Some foresee potential rate reductions of up to 1.5% by the end of the year, while others forecast a mere four quarter point cuts come the beginning of 2025.
Any rate reductions from the ECB’s current level of 4.75% will certainly be welcomed by a large number of homeowners, nonetheless, Hennessy stresses that a fall in interest rates below 2% would necessitate a rather significant economic upheaval. Mortgage holders longing for the return of the significantly reduced rates seen from 2016 to 2022 will be disappointed.
Irish homeowners currently hold over 700,000 mortgages, with approximately 500,000 of these being primary residences, according to Hennessy. Within this number, an estimated 120,000 are on tracker rates where the loan interest mirrors the ECB’s activity. Any changes in ECB’s rate will directly affect these tracker rate mortgages within a one month period.
Those who gained the most from the period of extremely low rates have been affected mostly by the ten rate increases implemented since July 2022, which saw the ECB rate skyrocket from 0% to 4.75%. Given that the average tracking margin in the Irish market is around 1.15 percentage points above the ECB rate, the typical Irish mortgage holder with a tracker rate is currently burdened with an interest rate of approximately 5.9%.
Also closely monitoring the situation are the 70,000 Irish mortgage holders whose low fixed rates are predicted to end in the coming months, as notified by Doddl.ie’s Hennessy.
Those on standard variable rates are a smaller demographic, yet include approximately 80,000 loan holders managed by Pepper, a mortgage service provider, on behalf of several investment funds, commonly known as vulture funds. These borrowers are often high risk due to volatile credit ratings. Being financially unstable, they are burdened with a premium for their past credit mistakes and are likely to be most in need of relief.
Here lies the problem – there’s no guarantee that Irish lenders will immediately reflect any European Central Bank rate cuts for those taking out a new mortgage, whether they are first-time buyers or financing a home relocation. As Hennessy suggests, banks may delay passing on the full extent of cuts, as they have failed to relay the increase of the past two years fully. The timing of their rate adjustments for customers will depend on their own financial position and broad market dynamics.
Various factors will influence a drop in Irish market rates, including the lending practices of Irish lenders and notably, the lack of market competition. Hennessy mentions that there was a period where political pressure had a role in maintaining rates; however, that is less impactful now due to state ownership in pillar banks.
Hence, customers should take a more active approach in scouring for the best rates, convincing less competitive banks to expedite the benefits of lower rates. In recent times, lack of action has cost Irish savers significantly, as they kept their capital in low- or non-interest-bearing accounts even when banks began to present more attractive investment options.
The banks, surprisingly, noted this incapacitation of consumers to act in their own best interest, resulting in large profits made predominantly from the additional savings they were securing 4% from the Central Bank whilst offering minimal to nothing to the savers.
The onus is on consumers not to repeat this mistake with their house loans. Despite poor competition within the Irish banking sector, Hennessy points out a record 3.3 percentage point disparity between the current highest and lowest mortgage rates.
It’s crucial for individuals considering switching loans or lenders, or coming out of fixed rates, to realise the potential power they hold, as per the expert’s advice. The accumulation of equity in your home, resulting in a reduced loan-to-value ratio, or qualifying for a more favourable eco-friendly loan due to achieving a B3 or higher Building Energy Rating through measures such as insulation improvements and solar panel installations, can all provide homeowners with a prime opportunity for accessing the most competitive interest rates.
It is strongly advised against to readily accept the initial rate offered upon the conclusion of a fixed term. Instead, lenders should be actively contacted, questioned and alternatives in the market assessed.
New property owners are also recommended to carry out thorough research. The largescale contrasts between the best and worst rates on the Irish home loans market mean a lack of investigation could result in high cost implications, even if future rate reductions are applied.
Another concern for those considering the stability of a fixed-rate loan is deciding the duration of the commitment. Hennessy highlights that in 2020, homeowners had the choice to secure seven-year fixed rates at 2 percent or lower. As rates began to ascend in 2022, a substantial number chose five-year terms as protection from further increases. Predictions of upcoming rate drops have led homeowners to lean towards shorter fixed terms, such as three years, with an increase noted in those opting for variable rates.
The main takeaway for mortgage holders is to be assertively proactive in their pursuit of value. While holders of tracker loans will automatically see a decrease in their borrowing costs, these represent less than 20 percent of mortgage clients and aren’t available to those presently in the mortgage market, whether as new clients or switchers. The remainder can primarily benefit when banks decide to decrease their rates.
Should the 500,000 domestic loan borrowers not on tracker tariffs or with companies such as Pepper display an indifference akin to our savings behaviours, there will be no motivation for the banking sector to communicate the advantages of impending ECB interest rate cuts promptly. It benefits the consumer to harness persuasive power. Investing time to locate the ideal rate on offer and acting accordingly, can effectively prompt lenders to swiftly transfer the perks of interest rate reductions. If you didn’t catch our newsletter from the previous week, it is accessible here for your perusal.