ECB increases interest rates by 0.5%, thousands face mortgage hikes

James Cox

The European Central Bank has raised interest rates by 0.5 per cent to address inflation, the first time the bank has raised rates since 2011.

Irish tracker mortgage holders will be affected, while other mortgage holders may be impacted depending on how banks react to the announcement.

Joey Sheahan, head of credit at online broker MyMortgages.ie, explained: “Today’s announcement will hit the pockets of the approximately 300,000 mortgage holders on tracker rates and probably the approximately 200,000 on variable rates."

Thousands will scramble to fix their rate now.

An example of what this might cost the average household in Ireland is as follows:

Tracker Rate

(Based on a €250,000 mortgage with 25 years remaining on a 1 per cent tracker rate increasing 1.50 after the ECB’s announcement):

• 0.5 per cent increase means that a borrower will pay an extra €47 monthly or €564 annually or €14,100 over the life of mortgage.

Variable Rate

(Based on a 0.5 per cent increase in interest rates from 3.2 per cent to 3.7 per cent on a €250,000 loan amount over 25 years would increase monthly repayment from €1,211 to 1,278 which is an additional €67 monthly or €804 annually or €20,051 additional interest over 25 years):

• Total interest repaid would increase from €113,509 to €133,560.
• If the loan amount is higher or the term remaining is longer, this will exacerbate the increase in interest.
• For example if this loan was over 30 years it would be an additional €25,000 instead of €20,051.

The ECB interest rate hike comes after the US Federal Reserve decided to increase rates earlier this year.

Focus will now move to lenders and how they react to the ECB announcement.

Mr Sheahan said: "One thing is certain, whatever the size, a rate increase will have a knock-on impact for hundreds of thousands of mortgage holders over the short-to-medium term.

"While switching activity has been busy this year to date, we expect a flurry of activity over the coming months as people move to try to lock in fixed rates and somewhat shield themselves from further increase rate rises.

"Fixed rates are dominating the mortgage market, and it’s easy to see why – by choosing a long-term fixed rate, a borrower can fix at a rate of 2.5 per cent for 25 years, so they never have to worry about rate increases for the full duration of their mortgage. This is based on a loan to value of under 60 per cent."