ECB rate move welcomed but across the board rate cuts are unlikely

Tracker mortgage holders will immediately benefit from the 0.25 per cent cut in interest rates announced by the European Central Bank (ECB) this afternoon.

However borrowers on variable rates and those coming off fixed rates or looking for a new mortgage may have to wait some time to see any benefit, industry analysts have warned.

The Taoiseach Simon Harris welcomed the move by the ECB.

“Many households have experienced increases in their monthly mortgage repayments during a cost-of-living crisis,” the Taoiseach said. “As we move into an era of interest rate reductions, we need mortgage holders to feel the benefit.

He said he had written to the banks and would be meeting them shortly “for a discussion on this.”

In an apparent response to the calls from the Taoiseach for banks to act swiftly and pass on rate cuts to borrowers, Banking and Payments Federation of Ireland chief executive Brian Hayes noted that “interest rates and pricing of lending is a commercial matter for each bank or nonbank lender that operates in the market place. In addition, lenders are legally prohibited – under strict competition rules – from signalling any future pricing change either publicly or privately.”

Over the last two years Irish lenders had “sought to take a balanced approach in the pass through of these rates mindful of the cost of living challenges which households have had to contend with,” Mr Hayes said.

“When comparing rates across the euro zone member states, banks in Ireland have passed through the third lowest increase in new mortgage interest rates between May 2022 and April 2024,” he said.

The Minister for Finance Michael McGrath noted that there are around 186,000, tracker mortgage accounts, in Ireland and for this “very significant number of people” the cut would be “very welcome news” but that it came “against a backdrop of ten increases that amounted to 4.5 per cent”.

He said that while the cut would take “some pressure off many borrowers” it is “only a small fraction of the amount of the increases”

With regard to non tracker customers he said there was not homogenous treatment where rates were climbing.

“In the case of the main banks for example the pass through of those increases was probably between a third and a half overall of the increases at ECB level … But of course, when it came to the non lending nonbank sector, many of the investments on funds, the pass through on the variable side was 100 per cent. And so those are many of the customers that are under the most pressure and will be watching very closely”

The rate cut will see tracker mortgage holders repayments fall by around €13 per month for every €100,000 still owed with rate reduction passed on by lenders within 30 days.

The widely anticipated move comes after 10 successive hikes which began in July 2022 and signals a significant shift in the monetary policy of the ECB.

Darragh Cassidy of price comparison and switching website bonkers.ie said that as the cut in interest rates was well flagged several mortgage lenders had already cut their fixed rates in advance of the move.

A tracker holder with €200,000 remaining on their mortgage over 10 or 15 years will see their repayments fall by around €25 a month, he said.

Tracker customers will also benefit from a technical 0.35 percentage point cut in September as the ECB has flagged that it’s reducing the gap between its main refinancing operations rate (off which trackers are priced) and its deposit rate by this amount, he added.

“Those on variable rates may have to wait a bit longer to see anything positive though. The main banks only passed on a fraction of the ECB rate hikes to their variable-rate customers in the first place,” he said. “So, there may not be much movement from the banks here, at least initially.”

Mr Cassidy said a degree of uncertainty remains “as to what the future path of rate reductions will be” but he expects “at least one or two more quarter point cuts before the end of the year.”

He also warned that falling interest rates are also likely to lead to lower savings and deposit rates eventually.

Irish savers have over €150 billion on deposit with Irish banks right now but Mr Cassidy noted that “the vast majority of the money is in easy-access demand deposit accounts that are paying little to no interest,” he said. This is despite rates of up to 3 per cent being on offer from AIB and Bank of Ireland, and rates over 3% being on offer from the likes of N26, Trade Republic, and Raisin.

“I’d really encourage anyone with savings to make sure they’re getting the best return for their money before rates start to fall,” he said.

Rachel McGovern of Brokers Ireland said the reduction cycle by the ECB can be expected to be “minimal and slow, with little prospect of a return to the historically low rates that prevailed before July 2022.”

She pointed out that some lenders have moved already to cut rates with Avant Money, PTSB, AIB group including EBS and Haven mortgages and Bank of Ireland including the Mortgage store all cutting rates over the last few months.

“Non-bank lenders such as Finance Ireland and Dilosk still have a part to play and may be in poll position to look at innovative, reasonably priced alternatives,” she said.

ICS, which is owned by Dilosk, said on Thursday it would cut some standard variable rates by a quarter of a percentage point from July.

She said 80,000 homeowners, coming off fixed rates this year will be facing higher than expected rates since “the interest rate world has changed utterly since they took out their mortgages a few short years ago, “.

However, the next year could be brighter, she said.

“If you’re on a fixed mortgage with a year or so to go you might come out of the fixed rate at a much better time,” she said. “The market will settle over time and longer term fixed rates may become more attractive.”

According to Mark Coan of moneysherpa.ie “lending rates are set to hover around the 4 per cent mark for the foreseeable future. All the signs are that the ultra low mortgage rates seen after the financial crash were an anomaly and we are now reverting to normal”.

He suggested that anyone expecting a return to mortgage rates of 2 per cent and below “may be in for disappointment. ”

He said people looking to borrow new money would be advised to act sooner rather than later. “Fixed rates are not expected to fall much further, but house prices are expected to rise by a further 4 per cent this year,” he said.

Martina Hennessy of brokers doddl.ie pointed to a significant discrepancy in the rates charged by lenders with some lenders attaching interest of 3.45 per cent and others charging over 7 per cent.

“We may see further decreases on individual rates and the nonbank lenders, who are lending at up to 7 per cent, should start to reduce rates as funding costs decrease,” she said.