Interest rates are always a zero sum game: when they go down, mortgage and other debtors can celebrate. When they go up, anyone who is living on a fixed income, or has invested in the stock market, are the ones who will benefit.
After coming down seven times in the past year (from ECB 4.25 to a single per cent) it now looks as if interest rates that the Irish banks charge us, based on how much they pay each other in the interbank lending market, could be on the way up again.
Last week AIB announced it was slightly increasing the cost of its three, five and 10- year fixed rate homeloans.
Fixed rates are the product of the banks’ wholesale money markets and they are often considered the canary in the mortgage market coalmine because their movement usually predicts which direction retail mortgage rates are moving.
When banks raise fixed rates it usually signals higher rates going forward for most loans; when these key rates fall, we can usually expect to overall cost of money to come down.
The three year and five year AIB rates, which had been amongst the lowest on the market at 3.10 and 3.69 per cent respectively, have gone up to 3.19 and 3.86 per cent. The new 10-year rate rises from 4.41 to 4.65 per cent.
Since every additional 0.25 per cent increase typically adds about €15 to every €100,000 borrowed over a 20-year period, anyone with a typical €250,000 mortgage over a 20-year term who takes out the new 10-year fixed AIB loan can expect to pay an additional €45 a month.
Is this rise in the fixed rates by a single bank a shot across all mortgage holders bows?
Some commentators think so: the whole point of government and central banks slashing interest rates since the credit crisis began was to try and get businesses and individuals borrowing again and so called ‘growth’ back into our economies.
The problem, however, is that this tactic, which is always used when economies fall into recession, hasn’t worked this time.
And that’s because this isn’t a typical recession. It is the Great Recession of the 21st century and it was caused – ironically – by decades of interest rate manipulation by politicians and central banks whose primary goal was economic growth…even at the cost of regular booms and busts.
The post 2001 recession reaction (after the NasDaq stock market crash and the 9/11 attacks) was overdone: rates fell too low and even more money was created through the dangerous leveraging of the sub-prime mortgage (and other) debts by investment banks and other money dealers.
The mad global property and spending bubble had to collapse. This time the consequences – massive unemployment and a contraction in global growth is not reacting to all the new efforts – the low interest rates, the massive borrowing on global bond markets, the printing of money out of thin air.
The bubble that’s been created in the global bond market by the pumping out of more cheap money is having its own effect in forcing up the interest yield on bonds. These yields ultimately affect the price of borrowing on the high street.
If you have a large mortgage loan, you might want to at least think about how you will pay it every month if the ECB does start putting up its interest rates again.
Any upward move is likely to be very gradual, but keep in mind that the Irish lenders are within their rights now to increase a variable rate. As AIB has shown, they don’t have to wait for the ECB to move first.
Variable rate mortgage holders should consider fixing their mortgages now if they believe that ECB rates are on the way up.
Otherwise, they need to occasionally stress test their own finances: could they cope with a hike of two or three percent interest?
Even the lucky tracker mortgage holder with a €250,000, 0.75 per cent tracker premium (i.e. 1.75 per cent at today’s rates) would need to find another €195 a month if the ECB were to bring their own rate back up to 4.25 per cent.
There’s not much a saver can do, but wait. The return of higher interest rates – when it happens – will certainly result in a better return on your funds: instead of say, €2,250 gross return on savings of €100,000 a return to ECB 4.25 per cent will nearly double your gross return to €4,250 gross.
How long before the official ECB rate goes up again is anyone’s guess, but I suspect it will happen sooner than later: an awful lot – trillions, in fact – of borrowed, lent and printed money has been created by the world’s central banks and governments to stop this Great Recession and bail out the banks.
That money has to spill over into our world eventually, pushing up prices. When it does, interest rates will rise. So will prices.
AIB’s tiny upward rate move last week might just be the little gas leak that starts the mortgage rate canary to begin wobbling on its perch.
Jill Kerby welcomes reader’s letters. Please write to her via The Munster Express, 37, The Quay, Waterford or directly at firstname.lastname@example.org