Mortgage rates might climb to an average of 6% later this year if the European Central Bank continues to raise interest rates. With our own Central Bank relaxing mortgage lending standards and allowing borrowers to acquire houses worth up to four times their salaries, it’s wonderful news for home purchasers, but they’ll be paying a lot more in interest rates than a year ago. Daragh Cassidy of consumer advice website bonkers.ie investigates if housing prices will decline this year…
According to bonkers.ie, higher interest rates will have an influence on mortgage repayments and affordability, as well as the potential impact on house values.
Mortgage rates in Ireland are rising after several years of ultra-low interest rates. By a long shot.
Since last July, the European Central Bank (ECB) has been on an aggressive path of monetary tightening, raising its primary lending rate from 0% to 3%, with another hike to 3.5% practically certain in March and 3.75% expected by the end of the summer.
If the main ECB rate reaches 3.75%, the best mortgage rate available in Ireland by the end of the year will most likely be approximately 5.65%.
This is because the minimum ‘spread,’ or gap between the main ECB rate and the best rate on the Irish market, has been roughly 1.9% in recent years, but competition may keep it somewhat lower in the future.
This rate, however, will most likely be a ‘green’ rate for people purchasing a property with a BER of A or B or with a deposit of more than 40%. The average first-time buyer or mover will most likely pay closer to 6%.
WHERE DO WE GO FROM HERE? Near-record global inflation over the last year has prompted central banks throughout the world to rapidly raise interest rates. For example, interest rates in the United States are presently 4.75%, 4.25% in New Zealand, 3.35% in Australia, and 2.5% in Sweden.
The ECB has already raised interest rates by three percentage points to 3%, with further increases on the way.
And, while the big lenders in the country have been sluggish to pass on all of the ECB rate rises (the Bank of Ireland, for example, has only raised its fixed rates by one percentage point), this is unlikely to persist.
Despite the fact that large rate rises in Australia, Sweden, and New Zealand have already resulted in a drop in property values, most analysts predict sustained price growth in Ireland, albeit at a far lower pace than in recent years.
This is mostly owing to rapid population expansion, considerable immigration, a robust economy, and a persistent imbalance between housing supply and demand.
The Central Bank’s relaxation of mortgage lending standards at the start of the year is also considered as supportive to price increases.
However, rising interest rates will have a massive impact on mortgage repayments, potentially increasing repayments by more than 60% for first-time buyers unless house values decrease considerably.
Until the middle of last year, a first-time buyer or mover borrowing €300,000 over 30 years might have gotten a mortgage rate of roughly 2%. This corresponds to a monthly payments of little about €1,109.
Borrowing the same amount at 5%, on the other hand, will cost €1,610 a month, or about €500 more. Borrowing €300,000 at 6%, which is where mortgage rates in Ireland are headed, will cost over €1,800 per month, or nearly €700 more per month than borrowing the same amount at 2% a year ago.
However, rather of paying more (since there is a monthly restriction on how much additional purchasers may pay), they may be obliged to borrow less. As a result, house prices may decline…
Mortgage rates are CRAZY.
IE IS NOT SAYING THAT PROPERTY PRICES WILL FALL BY THE AMOUNTS MENTIONED BECAUSE THERE ARE MANY OTHER FACTORS TO CONSIDER.
DO YOU WANT TO LOAN LESS? If mortgage rates in Ireland climb to 5%, either the amount borrowed or home prices must fall by roughly 30% to maintain the same monthly repayment of around €1,10,9 as in our previous scenario. If mortgage rates climb to 6%, the amount borrowed or home values must fall by about 40%.
In other words, borrowing €185,000 at 6% for 30 years costs the same per month as borrowing €300,000 at 2%.
WILL HOUSE PRICES FALL? Bonkers. ie does not guarantee that house prices will decline by the amounts shown above, as there are other other factors to consider.
This is only one example, but it demonstrates the significant impact that a few percentage point increase in interest rates will have on monthly repayments and affordability in the future years. Forecasts for property price increase in recent years have focused mostly on the imbalance between supply and demand. And, to a lesser extent, the Central Bank of Ireland relaxed mortgage lending standards at the start of the year.
With the supply of new houses (under 30,000 per year) remains significantly below the level required to fulfill demand, price increases will be supported.
According to the most current Central Statistics Office property price statistics, prices in Dublin declined 0.2% in November compared to October, but prices outside of Dublin climbed. However, all things considered, prices are anticipated to reduce countrywide this year and next.
However, they are unlikely to decrease far enough to compensate for rising mortgage rates, which means that things will remain difficult for first-time buyers.
