There is uncertainty surrounding the European Central Bank’s (ECB) upcoming decision on whether to raise interest rates. After nine consecutive rate hikes, homeowners with tracker mortgages and first-time buyers have felt the impact of increased borrowing costs. Additionally, around 70,000 homeowners facing the end of fixed rate periods this year will confront hefty repayment hikes.
Money markets predict that the ECB will hold off on another rate hike due to concerns about a potential recession in Europe. However, some economists argue that inflation remains a persistent issue and expect rates to rise once more this week. There are even fears that if the ECB refrains from announcing a rate increase this month, it could do so in October, marking the tenth rise.
For every 0.25 percentage point increase in mortgage rates, borrowers face an additional €156 in annual repayments per €100,000 borrowed over 25 years. The average outstanding amount on a tracker mortgage is €133,000, meaning that homeowners have already experienced an extra €280 in monthly payments due to the previous nine rate hikes. This accumulates to an additional €3,360 in payments over a year.
Although money markets are leaning towards no rate hike this week, economist Conall Mac Coille from Davy Stockbrokers suggests that a 0.25 percentage point increase cannot be ruled out. Similarly, economist Dermot O’Leary from Goodbody Stockbrokers believes that the markets undervalue the possibility of a rate hike due to high inflation.
Economist Austin Hughes predicts a “hawkish pause,” where rates will not rise this week but warns of potential increases later this year if inflation does not decrease. Money markets have calculated a 38% probability of a rate hike this week, but according to Dutch central banker Klaas Knot, markets may be underestimating this likelihood.
The ECB aims to use higher rates to control inflation in the eurozone, which, although halved since the previous year, still stands at 5.3% in August, significantly surpassing the ECB target. Rising oil prices and a weak euro contribute to upward inflationary pressures, leaving room for another rate increase.
Since President Christine Lagarde’s tenure began, the ECB has raised borrowing costs at nine policy meetings in just over a year. Around 120,000 homeowners, particularly those with tracker mortgages, and individuals unable to switch from vulture funds with high variable rates have been most affected by these rate hikes. Moreover, mainstream banks now charge higher fixed rates to new homebuyers, while those transitioning from existing fixed rates face increased costs.
Approximately 72,000 mortgage customers will come off fixed rates by the end of the year and will experience higher monthly repayments due to the inability to secure favorable fixed rates they previously enjoyed. The Central Bank reported that the interest rate on new mortgages reached 4.04% in the summer.
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