[Article] Homeowners warned that mortgage rates likely to rise

The_Conductor

http://www.independent.ie/business/personal-finance/property-mortgages/homeowners-warned-that-mortgage-rates-likely-to-rise-2013017.html

HOMEOWNERS were last night warned that banks and building societies are set to hike mortgage rates, starting as early as March.

The move would hit the thousands of people with standard variable rates, as lenders are free to increase these mortgage rates irrespective of what the European Central Bank (ECB) does.

People with standard rate mortgages should lock in to a fixed rate, as these rates are at historically low levels, a report by Karl Deeter of Irish Mortgage Brokers, advises.

Under-pressure lenders will push up standard variable rates by as much as 1pc this year, and another 0.5pc next year, Mr Deeter said.

"This will apply to existing variable-rate holders and not only to new business applicants. It is just a question of who will move first," the report states.

Some eight out of 10 mortgages in the Irish market are either standard variable or tracker mortgages.

There is no breakdown available of the numbers of each, but it is estimated that up to 250,000 homeowners have standard variable rates. Trackers can only rise when the ECB rate changes.

Last summer, Permanent TSB was heavily criticised when it raised the rates by 0.25pc for its existing standard variable-rate customers. The move impacted 50,000 customers.

Other banks, including AIB and Bank of Ireland, were thought to be preparing to hike their rates at the time but held back following the criticism of Permanent TSB.

The Irish Mortgage Brokers' report warned that there could be pain for those with tracker rates as well this year.

Tracker mortgage rates only move when the ECB changes its rates, but Mr Deeter has warned that a rate rise could come as soon as the end of the summer, with a 0.5pc rise likely.

Losing

But Mr Deeter said banks and building societies would be forced to push up mortgage rates for existing standard-rate customers ahead of any ECB change because they were losing money on mortgages.

"There are already foreign-owned banks with variable rates in excess of 5pc and 6pc. For indigenous banks to be in the market as low as 2.25pc is ridiculous," Mr Deeter said.

Ulster Bank has a variable rate of 5pc and Bank of Scotland (Ireland) has a 6pc rate, with AIB charging as low as 2.25pc.

Mr Deeter advised anyone with a standard variable rate to lock in to a fixed rate.

"We believe there is a small window of opportunity on the fixed rate front that we will not see recurring for many years," he said in the report.

The report also calls for a mortgage rescue scheme to be introduced, warning that higher interest rates could lead to homeowners struggling to meet repayments and a further implosion of the housing market.

Mr Deeter warned that Bank of Ireland and AIB come to the end of the one-year moratorium on repossessions next month.

Meanwhile, the Professional Insurance Brokers Association said that the ECB may not raise rates immediately, but this will not stop lenders from attempting to increase rates.

Rachel Doyle of PIBA said: "Mortgage holders would be well advised to consider fixing for periods of five years or longer. Fixing at a good rate for longer terms gives security and enables better planning."

Duckjob

So anyone considering buying now should really be stress-testing themselves for a 5-6% interest hike.

For people just hanging in there at the moment on variable and tracker mortgages, this is going to hurt like hell...

Cookie_Monster

smccarrick wrote: »

The report also calls for a mortgage rescue scheme to be introduced, warning that higher interest rates could lead to homeowners struggling to meet repayments and a further implosion of the housing market.

So once again those of us who were sensible with our money will be forced to pay for those who weren't :mad:

let them suffer, its not my fault someone was stupid enough to buy a house at 5-10 times it "real" value

Fozzie Bear

5-6% repayment hikes and the Bank of Ireland and AIB one year moratorium on repossessions ends next next month!

Man there is just so much sh!t that has yet to hit the fan out there. And to think the EA's were trying to tell us (again) yesterday that we are near the bottom of the market!

Plates

Cookie_Monster wrote: »

So once again those of us who were sensible with our money will be forced to pay for those who weren't :mad:

let them suffer, its not my fault someone was stupid enough to buy a house at 5-10 times it "real" value

Were you sensible with your money - or did you just happen to buy a house 10 or more years ago before things outside of a typical buyers control sent prices skyrocketing?

spockety

Duckjob wrote: »

So anyone considering buying now should really be stress-testing themselves for a 5-6% interest hike.

For people just hanging in there at the moment on variable and tracker mortgages, this is going to hurt like hell...

I said it in another thread, people should base their affordability calculations on the assumption of an interest rate of 7.5%.

This significantly decreases the likelihood of a mortgage holder finding themselves in shock/difficulty during the lifetime of their mortgage.

omahaid

I'm still going to hang on to my tracker I think.

AARRRGH

About time.

I'm not happy my tax money is subsidising other people's mortgages in the form of paying for the bank's losses.

If the banks can't afford to have their mortgages at their current rate, they need to do something about it.

seamus

Fozzie Bear wrote: »

5-6% repayment hikes and the Bank of Ireland and AIB one year moratorium on repossessions ends next next month!

Rates won't jump by 5-6%. Rates will jump to 5-6% in the worst case scenario, that's if you assume an ECB increase of 3%, which is not unheard of, but won't happen in the short or medium term. It might jump by 2% over the next 3 years, if even that.

Do mortgage brokers not get better commission when they convince customers to go on a fixed rate? Is nobody at all suspicious that a broker is trying to convince people to fix, and the economists haven't said anything? Or maybe this news just suits some peoples' viewpoints.

Duckjob wrote: »

For people just hanging in there at the moment on variable and tracker mortgages, this is going to hurt like hell...

Tracker mortgages aren't affected by the bank's hikes, only the ECBs. People on trackers are in the best position, as most fixed rates currently being offered are 2-3% above the tracker rates.

Da GOAT

is there anything stopping interest rates going beyond 7.5%?

spockety

Da GOAT wrote: »

is there anything stopping interest rates going beyond 7.5%?

In theory no.

However, the medium to long term stated aim of the ECB is to stabilize and maintain their interest rate at about 4%.

Add in bank margins of 2-4% going forward, and it would appear that 7% or thereabouts will be the long term peak interest rate for mortgage credit.

I think basing your affordability calculations on 7.5% rates will dramatically reduce your chances of finding yourself in trouble.

Though this set of charts is US based, a lot of it applies similarly to Ireland.

http://newobservations.net/propertys-value/

As it says: "If your Real Estate Broker (Estate Agent) says 'buy now' because rates are low, they are either dumb, delusional, or deceptive".

The_Conductor

spockety wrote: »

In theory no.

However, the medium to long term stated aim of the ECB is to stabilize and maintain their interest rate at about 4%.

Stated policy is 'normalisation' of ECB base rates at 4.5%

spockety wrote: »

Add in bank margins of 2-4% going forward, and it would appear that 7% or thereabouts will be the long term peak interest rate for mortgage credit.

My reading of stated policy- is that 6-7% would be considered to be the norm- not the peak. Average current 20 year rates in the Netherlands (people there tend to fix their mortgages for the entire term of the mortgage) is 6% at present.

spockety wrote: »

I think basing your affordability calculations on 7.5% rates will dramatically reduce your chances of finding yourself in trouble.

Big time. How many Irish are doing this though? Very very few I guess......

spockety wrote: »

Though this set of charts is US based, a lot of it applies similarly to Ireland.

http://newobservations.net/propertys-value/

As it says: "If your Real Estate Broker (Estate Agent) says 'buy now' because rates are low, they are either dumb, delusional, or deceptive".

Big time. I used to be amused at the number of threads in Accommodation and Property where comments from estate agents were held up with bizarre esteem. There are even a few current ones.

People- estate agents are not your best friends. They do not have your best interests at heart. If you imagine they do- you are delusional. People need to educate themselves.......

kmick

Da GOAT wrote: »

is there anything stopping interest rates going beyond 7.5%?

Yeah Germany and France! It will never go higher than 5 imho - of course that could mean bank rates of 7.0.

Duckjob

spockety wrote:

As it says: "If your Real Estate Broker (Estate Agent) says 'buy now' because rates are low, they are either dumb, delusional, or deceptive".

My bet would be on them being all 3...

warrenaldo

spockety wrote: »

In theory no.
As it says: "If your Real Estate Broker (Estate Agent) says 'buy now' because rates are low, they are either dumb, delusional, or deceptive".

However, is it easier to get a mortgage when the interest rates are so low?

If interest rates go up to 7.5% will the amount I get on a mortgage dramatically reduce. Or the possibility I will not get a mortgage at all. So is it true that if i do not buy now I may not be able to get a mortgage when interest rates are at 7.5%

Duckjob

warrenaldo wrote: »

However, is it easier to get a mortgage when the interest rates are so low?

If interest rates go up to 7.5% will the amount I get on a mortgage dramatically reduce. Or the possibility I will not get a mortgage at all. So is it true that if i do not buy now I may not be able to get a mortgage when interest rates are at 7.5%

Just as lower interest rates applied upward pressure on prices, higher rates apply downward pressure, meaning you wont need to go for that big mortgage in the first place...:)

JoeyJJ

The Irish vendors generally aren't dealing well with the other downward pressures from what I can see (looking at asking prices), not sure this is going to help them adjust prices any quicker.

The_Conductor

JoeyJJ wrote: »

The Irish vendors generally aren't dealing well with the other downward pressures from what I can see (looking at asking prices), not sure this is going to help them adjust prices any quicker.

How quick do you want prices to fall?
Nationally property prices fell almost 20% in 2009- and if current trends continue (they may accelerate if interest rates rise) look to fall by a further 15-18% in 2010.
You're not going to get a 10% fall month-on-month- we have had 2-3% falls, month-on-month- what do you have in mind when you say prices aren't falling fast enough?

If you look at residential property prices in Japan- which is about the closest thing we have to the Irish bubble- they are now at prices last seen in 1988 (i.e. 22 years ago) and are currently falling.........

In the year to the end of December we had a deflation rate of 5.1%- and the net take-home-pay of everyone isn't going to cause consternation until people see their January paychecks.......

People are a lot poorer- and consequently far less likely to spend money on big ticket items- and those who are capable of it are saving and paying down debt.

Prices will continue to fall- to what extent determined by sentiment. A higher interest rate is going to destroy Irish consumer sentiment- particularly among younger people- who are far more likely to be those with large debts.

JoeyJJ

I didn't say I wanted them to fall any quicker, what I was getting at was that the asking prices will probably remain unaffected by mortgage interest rate increase maybe I should have quoted DuckJob as it was more a response to his comment.

There are alot of threads on here and property pin where people are asking the true value or the what people think is the true value I suppose I would be happier if asking prices were closer to sales prices but that isn't going to happen.

techdiver

JoeyJJ wrote: »

I didn't say I wanted them to fall any quicker, what I was getting at was that the asking prices will probably remain unaffected by mortgage interest rate increase maybe I should have quoted DuckJob as it was more a response to his comment.

There are alot of threads on here and property pin where people are asking the true value or the what people think is the true value I suppose I would be happier if asking prices were closer to sales prices but that isn't going to happen.

I would be ideal if sale prices weren't confidential in Ireland. In fact I would go as far as to say we should publish the sale prices of houses. That would give the true level of things as we stand. If nothing it would put a halt to bulls**t that EA spout about "highly sought after", "holding their value", etc.

Gurgle

AARRRGH wrote: »

I'm not happy my tax money is subsidising other people's mortgages in the form of paying for the bank's losses.

Well then theres good news for you, your tax money is not subsidising other peoples' mortgages.

Your tax money is subsidising bank's losses through bad debts from inappropiate business loans.

Only 2.2% of residential mortgages are over 180 days in arrears.
linky

Senna

kmick wrote: »

Yeah Germany and France! It will never go higher than 5 imho - of course that could mean bank rates of 7.0.

I've heard a few people saying this, but before the ECB took over rates, the German central bank rate averaged at 7% (cant remember the time period, but was long enough). I'm not saying 7% is norm, but the Germans are a nation of savers so the average German wants higher rates, they just dont want the high inflation coupled with it.

The biggest factor to interest rate rises will be the price of oil, it will rise and if it goes up to $140+ a barrel again, the ECB norm of 4-4.5% will go out the window. I think 6-7% is prudent planning, but it can go higher.

Ogham

Mortgage brokers were pumping out the exact same story in April 2009 , last June (twice !) and last September. Of course - they are biased because need the work from mortgage switching - so they are just probably trying to scare people so they can get some commissions.

The_Conductor

Ogham wrote: »

Mortgage brokers were pumping out the exact same story in April 2009 , last June (twice !) and last September. Of course - they are biased because need the work from mortgage switching - so they are just probably trying to scare people so they can get some commissions.

Well- things have changed significantly since then.

1. Lenders are only taking on switches where there is no negative equity. The majority of mortgages issued since 2002, at open market values, are already in negative equity. These are also the people most likely to want to switch.

2. Fixing at 3 and 5 year rates are now seen as pricey (with major lenders in some cases already over 6%- and if you look at some of the alternates (such as Smart), you'll think they are insane.

3. International commentators expect the ECB to increase its rates later this year- particularly since inflation is creeping up. Almost half of the current inflation rate is accounted for by the increase in oil (its currently around $90 a barrel again)- however its feeding into inflation at an increasing rate.

4. Irish lenders have kept their loan margins at artificially low levels- there is already a case before the European courts concerning unauthorised state aid- international lenders in the Irish market are unable to compete with the rates which are low for political reasons.

5. With the conversion of preference shares to ordinary shares- the 'clout' the government had over the lending institutions has waned- and they have already submitted business plans to the EU based on viable models- which include a return to normal lending margins. (AIB's plan is currently being revised)

6. Where in the current article is there any suggestion that a mortgage holder would be well advised to switch to another lender?

Rather unusually for the Indo- its more a factual based article than they normally do, and is in agreement with economic concensus. People are going to get hurt- and if you think things are bad for mortgage holders now- you are going to be in an entirely new realm when the ECB starts to increase rates........

stepbar

Gurgle wrote: »

Well then theres good news for you, your tax money is not subsidising other peoples' mortgages.

Your tax money is subsidising bank's losses through bad debts from inappropiate business loans.

Only 2.2% of residential mortgages are over 180 days in arrears.
linky

2.2% is quite a large % TBH

The_Conductor

stepbar wrote: »

2.2% is quite a large % TBH

Thats the percentage that have over 6 months of arrears. There is almost 3 times this number that are 90 days (3 months) in arrears.

stepbar

smccarrick wrote: »

Thats the percentage that have over 6 months of arrears. There is almost 3 times this number that are 90 days (3 months) in arrears.

Back in 07' AFAIK the % was under 1%. Of course they were different times. I agree, rising interest rates are going to absolutely kill some people. I can't see the suitation getting any better TBH.

I think interest rates will have to rise to meet 5 yr borrowing rates + margin of c 1-2%. That would mean that variable rates in general could rise to c 4-5% before any increases in ECB. Banks cannot continue to borrow money on a short term basis.

bangersandmash

Looks like increase in rates is going to happen sooner than March, and far in advance of any ECB increases.

Permanent TSB is to increase mortgage rates by an expected 0.5 per cent for its standard variable rate borrowers by early next month. The move will set the tone for other lenders, which are preparing to raise their rates by as much as 1.5 per cent this year, putting pressure on borrowers.

http://www.thepost.ie/news/permanent-tsb-to-hike-mortgage-rates-46823.html

The_Conductor

bangersandmash wrote: »

Looks like increase in rates is going to happen sooner than March, and far in advance of any ECB increases.


http://www.thepost.ie/news/permanent-tsb-to-hike-mortgage-rates-46823.html

The issue is that Irish mortgage lenders have not increased the margins on their loans- akin to the manner in which this has happened internationally. At the moment its costing AIB and BOI 5.8% to borrow money on the interbank market (the ECB aren't lending any longer)- however they are charging far less than this to the vast majority of their customers.

Irish financial institutions are viewed by international lenders as a serious punt in the dark- which is why they insist on a larger margin than they do for interbank lending in other countries.

NAMA is seriously impairing banks ability to lend- as their capital ratios are badly impaired- but if you add in that its costing far more for lending institutions to borrow money than they are getting from borrowers- its really a totally unsustainable situation........

Permanent TSB's move is only going to be the first step of many- other lenders are going to follow suit.

warrenaldo

I am looking to buy in the near future. This thread is scaring the bejesus out of me.

I was aware that interest rates would rise - but not to the extent.

Will it not take 3/4 or even 5 years for it to rise by such a drastic amount. Surely in the next 2/3 years interest rates will only have risen by 1 or 2% at most.

Plus, Ireland will begin to recover in the next year or two (maybe). Meaning that interest reates would rise anyway.

seamus

warrenaldo wrote: »

Will it not take 3/4 or even 5 years for it to rise by such a drastic amount. Surely in the next 2/3 years interest rates will only have risen by 1 or 2% at most.

Correct. The european economies are still relatively fragile, so any drastic change in the interest rates risk dampening growth across the eurozone. The balance is in controlling inflation. I'd be very surprised if we see more than 0.75% increase in 2010 (even at that I'd be surprised), and I'd say the maximum it will have increased by at the end of 2011 is 2% (to 3% overall).

The problem however is as smcarrick points out - that money for new mortgages may not be coming from the ECB and instead is coming in at far higher rates. So the banks need to up the variable rates that they charge in order to make money on their loan book. This can be done independently of the ECB rate, and will be so until the ECB starts lending again or global money markets start to loosen up.

Changes in money markets are surprsingly quick thing though. At present, if you can get a mortgage, most banks offer you a base variable rate and tend to recommend that FTBs take out a fixed rate for a couple of years until they get accustomed to paying mortgages.

If you're looking for a mortgage now, I would recommend that you stress test your repayment ability up to 6% (the bank will do at least this anyway), and the see what kind of fixed rate is on offer. If you can get a 2 or 3 year fixed rate at something less than 4%, I would go for it (assuming that you're dead set on getting a house). By the time your fixed rate finishes, very few countries will still be in recession and lending will be more flexible again. IMHO, of course.

Whether the banks will be quick to lower their interest rates again though is anyone's guess. They may milk it for a year or two, especially if the rate of lending mortgages remains low.

unklerosco

Whats the best way to work out a mortgage repayment based on various possible interest rates?? Ie. current rates, 6% or 7.5% etc

bangersandmash

unklerosco wrote: »

Whats the best way to work out a mortgage repayment based on various possible interest rates?? Ie. current rates, 6% or 7.5% etc

This is very useful

http://www.drcalculator.com/mortgage/ie/

The_Conductor

unklerosco wrote: »

Whats the best way to work out a mortgage repayment based on various possible interest rates?? Ie. current rates, 6% or 7.5% etc

I'd do calculations based on all 3 scenarios- stress test at up to 7.5% and make accelerated payments while rates are lower, with the intention of returning payments to 'normal' levels as interest rates rise (when presumably you'll have paid off a chunk of your principle).

Irish rates are going to increase- independently of anything happening at the ECB- you need to prepare yourself for the worst case scenario- and if possible mitigate against it.