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Friday 18 January 2019

What the latest hike in mortgage rates will mean for you

MORTGAGE bank Permanent TSB will today announce a 1pc increase in its variable interest rate and the scrapping of fixed-rate mortgages. Other lenders will quickly follow suit. Here's what this means for you.

Q: Why is the Permo putting up its variable mortgage interest rate?

A: The Permo funds two-thirds of its €27bn Irish mortgage book by borrowing from other banks rather than from customer deposits. With the Irish banks in rag order, other, mainly overseas, banks are only prepared to lend to the Irish banks at extremely high interest rates. By increasing its mortgage rates the Permo is trying to pass on these higher inter-bank interest rates to its customers.

Q: Why is the Permo scrapping its fixed-rate mortgages?

A: The Permo had been charging its customers fixed mortgage interest rates of 5pc-6pc, depending on the period for which the rate was fixed. However, interest rate swaps, where lenders such as the Permo in turn fix their rates with other banks, are now running at between 7pc and 11pc.

Q: What will the latest rate increase cost homeowners?

A: Someone on a €100,000 20-year mortgage will see their monthly repayments rise by €54 from €616 to €670 while a homeowner with a €300,000 30-year mortgage will see their monthly repayments jump by a whopping €180 from €1,465 to €1,645.

Q: Will homeowners on tracker mortgages be affected?

A: Not for now. Tracker mortgages, where the interest rate charged is tied to the official ECB rate, will remain unchanged following today's announcement. That's not going to last. With market rates now much higher than official ECB rates all of the banks, including the Permo, are losing an absolute fortune on tracker mortgages. Expect the banks to try to find a way of wriggling out of tracker mortgages sooner rather than later. Even if they don't, the ECB is expected to start putting up its official rates in September with most analysts expecting a further rate increase in December.

Q: Will other banks follow the Permo's example?

A: Almost certainly yes. These latest increases will bring the cumulative increase in the Permo's variable mortgage rate to 2.5pc. The Permo's variable mortgage interest rate now stands at a towering 5.19pc. When the Permo started putting up its rates in late 2009 the other banks, after allowing a decent interval during which its rival attracted most of the hostile consumer and media reaction, quietly hiked their rates also. Expect the same thing to happen this time.

Q: If I am a Permo customer can I switch to another, cheaper lender?

A: Easier said than done. The days when you could switch mortgage lender at the drop of a hat are long gone. For a start anyone in arrears with their existing lender can forget about switching. Also stuck with their existing lender are borrowers who, through no fault of their own, are mired in negative equity where the amount owed on their mortgage exceeds the value of 'their' home. These two categories cover at least half of the almost 800,000 Irish homeowners with mortgages. In practice this means that most Permo customers will have no choice but to pay up.

Q: What will the latest increase from the Permo and follow-on rate hikes from other lenders mean for mortgage arrears?

A: That literally is the €64bn question. With official statistics showing that 5pc of all homeowners with mortgages are in arrears, and most independent observers calculating that the true level of mortgage arrears is at least twice as high, it is clear that many homeowners are living on a financial knife edge.

The Budget tax increases have piled even further pressure on hard-pressed homeowners. For many homeowners, already just about managing to get by, the latest round of interest rate increases could prove to be the straw that breaks the camel's back.

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