The inflation rate in Ireland is back below the European Central Bank’s (ECB) target of 2% per annum, figures released by Eurostat have revealed this week.
Our inflation rate has fallen to 1.7%, but it is not the same story throughout the eurozone — where the average rate is 2.4%.
The minutes of the ECB March meeting noted “the case for considering rate cuts was strengthening”, while some on the ECB Governing Council are weary of allowing inflation rebound, and others fear the eurozone is unnecessarily burdened by higher borrowing costs.
I believe that the first-rate cut of 0.25% will happen in June, with further cuts happening later in 2024 and into 2025. I expect to see rates fall by 1.25%.
This is very welcome news for mortgage holders.
We saw in March that tracker mortgage holders will get an addition boost of a rate reduction of 0.35% in September, unrelated to any rate cuts announced by the ECB, due to a realignment of ECB base and overnight deposit rates.
Therefore, tracker mortgage holders will see a decrease of 1.55% over the next 12-18 months, shaving €1,080 per annum off their mortgage repayments — noting the average tracker rate is 5.65% currently — with an average balance of €133,000 outstanding over 11 years.
It was interesting to note from the latest Central Bank of Ireland lending review that, in December 2023, there was an annual decrease of 18.1% in the value of home loans on tracker rates, down from the peak annual decline of 20.5% in June last.
The value of loans on variable rates increased by 5.9% annually, and the value of home loans on fixed rates increased by 24.6% in the year to December 2023.
Those taking out new mortgages need to seek advice before selecting their interest rate. Apart from fixed “green” rates — where the BER rating on your property is between A1-B3 — the fixed rates available range from 3.95%-5.25%, depending on your bank, while variable rates of 3.75% are available.
There is no cost to switch from a variable rate to a fixed rate. Although only three lenders have “green” rates , two of them do not allow you to switch from an existing fixed rate that is expiring to their new “green” rates.
The question remains whether banks will pass on the rate reductions straight away. The answer is “no”, other than for tracker mortgage holders.
When rates increased by 4.5% in the period from July 2022 to September 2023, to be fair, banks only passed on between 1.75 to 2% of those increases.
I expect a similar pattern when ECB base rates fall.
Taking an average mortgage of €300,000 over a 35-year term, the reduction in monthly repayments will be €135 or €1,620 per annum.
The deposit holders, noting there is €154bn on deposit with the banks, were the ones to suffer.
The rates available for deposit holders are pathetic and you must invest from a minimum of one year, and in most case 2-5 years, to get the kind of return you should be receiving from the retail banks.
Depositors have only themselves to blame, as only €6bn of deposits have left the retail banks.
In other eurozone countries, banks are paying more to attract deposits. On average, they pay 0.7% more for three month deposits.
So, as has happened for many years, the power of mortgage holders will hold sway. Bankers and politicians are influenced by this constituent more than depositors who will lose out.
The profits of the three retail banks show that higher interest rates charged to borrowers, all borrowers, is better for them and their shareholders.
- Michael Dowling is the managing director of Dowling Financial.
