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Dan White: No one will escape. We will all pay more for mortgages in just a few months time

The New Year is but a pup but already the bad news is piling up for embattled homeowners.

Battered by pay cuts, job losses and negative equity they now face the prospect of dearer home loans.

How come?

The European Central Bank (ECB) has left its interest rate unchanged at the record low level of just 1pc for over a year.

Forget about ECB rates.

With the Irish banks utterly dependent on State support to survive and their loan losses mounting by the day overseas, banks are increasingly reluctant to lend them money.



NERVOUS

When the Irish banks do succeed in borrowing money from overseas banks they are paying dearly for the privilege. And it's not just from overseas banks.

Look around you. Anyone with a few bob to save can go into most banks and get 3pc for their money if they are prepared to leave it for 12 or 18 months.

Meanwhile that same bank is lending the money to homeowners for 2.5pc or less.

How can you make money like that?

The answer is of course that you can't.

Profitable banking depends on the bank being able to lend the money for more than it must pay either its depositors or other banks.

That hasn't been happening with Irish mortgages for a year or more. Instead, as the banks' financial situation has gone from bad to worse, with the State having already pumped in €11bn of fresh capital with untold billions more to follow, foreign banks and domestic depositors have been growing increasingly nervous.

They have only been prepared to continue giving money to the Irish banks because their money is unconditionally covered by the State deposit guarantee.

Even with the guarantee, overseas banks and domestic depositors have been demanding a hefty interest rate premium before handing over the dosh to our bankrupt banks.

Up to now, with the exception of Permanent TSB which put up its mortgage rates by 0.5pc last July, all of the other banks have refrained from increasing their politically sensitive mortgage rates.

That's not going to last. As soon as Bank of Ireland, AIB and EBS transfer €40bn of their bad loans to NAMA, stand by for mortgage-rate increases.

The first of these will certainly have come by Easter, possibly even sooner.

While it is those on variable rates who will be hit first by higher rates, all homeowners will eventually end up paying more on their mortgages. And what can the Government do about all of this.

Surely, having pumped so much taxpayers' money into the banks and having promised to relieve them of their bad loans through NAMA, it has some influence over this matter?

Yes, but only until NAMA is up and running.

Then the need to keep the Government sweet disappears. In fact, post-NAMA, the Government will end up with the worst of all worlds.

The banks' need to start making money on their home loans again means that it will be powerless to prevent the banks from increasing their mortgage rates.

To make matters even worse these interest rate increases will start to come through just as negative equity begins to bite.

In other words, homeowners will find themselves being squeezed at both ends through a combination of dearer mortgages and falling property values.

And if you're in the public sector the vista is even more grim. Higher mortgage rates, which will reduce homeowners' disposable incomes, will make it even more difficult for the Government to put up taxes in next December's budget.

Instead they'll have no choice but to once again cut public spending.