This week one of the main banks increased its mortgage rates, if you are confused about where rates might go to next, here is our take on the current rate environment.
Why do mortgage interest rates increase?
Banks (excl. non-bank lenders) fund their mortgage lending by using a combination of surplus deposits from savers and by borrowing on markets. They borrow money to lend to you and so if their cost of funds (cost to acquire funds to lend to you) increases they will pass on this increase by increasing their mortgage rates.
The ECB have increased rates by 0.5% between June and September this year and it is expected that the ECB will increase rates again in December.
When rate increases have happened or when they are even anticipated markets price in these likely increases costing banks more to borrow funds to lend for mortgages.
While an increase in ECB rates only directly impacts tracker mortgages, so for example a tracker mortgage holder will automatically have seen their rate increase by 0.5%, a rise in ECB rates will result in mortgage rates increasing for everyone as it impacts funding costs for all banks.
Why might rates continue to increase?
The biggest risk to increased rates is persistent inflation (inflation measures the rate at which the price of goods or services increases over time e.g. how much more expensive is your weekly shop or your petrol than last month or last year) ECB uses rate increases as a tool in their armoury to cool inflation, so they increase rates to bring inflation down. Inflation sits at c. 3% presently and the ECB want to bring it as close as possible to 2%.
What to expect and why could more lenders start to increase rates? Are mortgage rates coming down?
Mortgage rates are influenced by a number of factors, costs, a competitive market etc.
Banks may increase rates due to higher funding costs, they may keep certain key rates level or decrease marginally to ensure they remain competitive to a certain cohort of customers e.g. on Green rates.
It is likely that we could see further rates increase before year end as opposed to mortgage rates coming down.
How do rate increases impact affordability and monthly repayments?
When looking at repayments it is important that you stress test repayments to take account for what your repayment might ultimately be as, regardless of the rate at time you get approval or loan offer, the rate that is applicable to your mortgage is the rate at time of draw down.
As a broad rule, for every €100,000 borrowed over 30 years at 0.25% increase this would mean a €15 per month increase, 0.5% would be €30 etc. Borrowing €400,k, then 0.5% increase would be €120 extra per month.
How doddl can help?
At doddl we work with all major lenders and we constantly monitor the market to ensure you get the best rate and terms for your current circumstances.
You don’t need to know everything about mortgages, that’s our job and we are here to help!
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