The great weather over the bank holiday weekend foreshadows better days for mortgage holders as the European Central Bank (ECB) will reduce rates by an expected 0.25% on Thursday, which will reduce the base rate to 4.25%.
This reduction will impact tracker mortgage holders in July. There are 179,000 customers with tracker mortgages who owe €15.4bn and represent 25% of the mortgage market.
Tracker mortgage customers will see a further one-off fall of 0.35% in September as the ECB aligns its various rates which will provide a further reduction in repayments each month. I expect at least one further reduction of 0.25% in 2024.
Any further reductions depends on the mood of policymakers who continue to hawkishly monitor inflation and wage growth across the eurozone.
ECB president Christine Lagarde previously cautioned that the regulator “will raise interest rates for as long as it takes to bring inflation back to our target” following the first rate increase in July 2022.
Large segments of the mortgage market — including 429,000 tracker customers, which make up 60% of the market, and 115,000 variable mortgage customers, which make up 15% of the market — are dependent on their individual bank in terms of what happens their rate.
When Finance Minister Michael McGrath said last week that he “expects banks to reprice their products accordingly”, he was referring to these two categories of mortgage holders.
Interest rates increased by 4.5% from July 2022 to September 2023 but banks only increased their fixed rates by 1.75% to 2%. In fact, variable rates only increased by 1% in the AIB Group, which includes EBS and Haven, while Bank of Ireland reduced its variable rate and PTSB increased theirs by 0.25%. Avant Mortgages do not have a variable rate option for new customers.
Banks will not pass on the full rate reductions as their appetite for market share and, more importantly, profitability determines the pricing of fixed and variable rate mortgages. In the last four weeks, Avant Mortgages and PTSB reduced their fixed rates and rates from 3.6% fixed are available.
AIB Group and Bank of Ireland have reduced their so-called green rates but remain very expensive for non ‘green’ rates compared to the other two banks.
The majority of 75% of housing stock in the Republic has an energy rating of C or less so seek advice before you consider a non-green rate from the two banks who have 75% of the mortgage market.
The variable rate mortgage customer with AIB Group has fared better remaining on a variable rate rather than on fixed rates over the last 10 years, particularly those customers who do not qualify for the recent trend of dual pricing such as green vs non-green.
A variable rate customer with AIB pays an interest rate of between 1% to 1.25% cheaper than a fixed rate customer with the same bank before any rate reductions are announced.
The Bank of Ireland’s variable rate is now cheaper than any of it fixed rates for non-green customers and Avant Mortgages “follow on” variable rate offering for existing customers is cheaper by 1% to any fixed rate offering from AIB for non-green mortgages.
Variable rate customers have one major and unique advantage over fixed rate customers in that they can make a part or full repayment of their mortgage without penalty, any time, throughout the term of their mortgage, a concession that is often overlooked and not available on a fixed rate mortgage.
- Michael Dowling is the managing director of Dowling Financial