It’s been a long time since the average consumer has had to worry about rising interest rates and how this impacted their monthly budget. That’s all about to change. The global economic outlook has been radically altered in the last 6 months. The impact of rising inflation, partly fuelled by the geopolitical turmoil, has brought the topic of interest rate increases to the fore. The Bank of England has moved recently, raising its base rate to 1.75%, the highest rate in 27 years. All eyes are now on the European Central Bank (ECB).
Several economic commentators are predicting that European interest rates will start to increase in the second half of 2022. Whilst many borrowers will be protected because they have a fixed-rate mortgage, there is a concern that rate rises, on top of the current cost-of-living crisis, will lead to some prospective borrowers having issues meeting affordability calculations in the future.
The ECB has a delicate balancing act, as while it needs to be seen to be doing something, small rises alone will not be enough to curb the current cause of inflation but could well help to tip the economy into a slowdown or even recession. Notwithstanding this, the negative interest rate environment was not sustainable in the long term. Without the pandemic, we would surely have seen these interest rate increases by now.
That said, although rising, interest rates are still historically low with lenders having a good supply of funds to lend. We are also still seeing new market entrants compete in the Irish market. Given the positive macroeconomic position of Ireland which also offers lenders one of the highest lending margin rates in Europe, we may see more new lenders enter this market in the next few years.
Rising interest rates will potentially impact all mortgage holders. While initially fixed mortgage holders will be protected from this increase they will surely enter a higher interest rate environment once these fixed terms end. The real impact will be on the circa 200,000 variable rate customers who are paying an average rate of 3.75%. An increase of one percentage point on a €250,000 mortgage would see current monthly repayments of €1,158 rise to €1,304, an increase of €146 per month making this repayment €1,752 more expensive over 12 months.