A decade of financial pain could be in store for mortgage holders with Leo Varadkar stating that rising interest rates could persist for 10 years.
After a series of nine rate hikes by the European Central Bank, adding up to a €6,000 annual extra cost for some Irish households, the Taoiseach said rates of 3% to 5% may become the norm for the next five or 10 years.
Rates are now at their highest level since 2000, rising to 4.25%, while the Taoiseach has said they could hit 5%, and be almost on a par with soaring interest rates in England, which have hit 5.25%.
Mr Varadkar said yesterday: ‘I think it would be a mistake to make the assumption that interest rates won’t be in that 3% to 5% band for the foreseeable future, they might well be.’
His sentiment was echoed by the Irish Mortgage Holders Association which said that the outlook for the future is ‘very, very bleak’ for prospective buyers and existing home owners, but added that the Taoiseach was ‘raising the white flag’ in terms of looking out for prospective home buyers.
Mr Varadkar said the long period of low interest rates has come to an end, in a blow to those struggling to buy a home at already inflated prices and with low levels of supply.
He said: ‘We had a prolonged period of very low interest rates… It might be the case that interest rates of 3% to 5% become the norm for the next five or 10 years and we need to bear that in mind.
‘We had a very prolonged period of very low interest rates in Europe. That was unusual and that has now come to an end.’
David Hall of the Irish Mortgage Holders Association told the Irish Daily Mail: ‘It’s a very, very bleak picture and, unfortunately, nobody’s going to get good news. I think when the Taoiseach sounds the alarm bell himself and raises the white flag – and that’s what he’s doing with that statement – It’s like he’s saying: “There’s not many houses you’re going to be able to afford to buy and you’re not going to get mortgages.”’
Finance expert David Lowe said the increases have put people off trying to buy a home.
‘These comments are certainly going to kill a lot of aspirations for people who want to get into their homes. And young people in particular.
‘I see a fall off already in applications because people want to hold on thinking that this is going to get cheaper. But, you know, the sad reality is it is still cheaper to buy your home than to rent.’
Sinn Féin finance spokesman Pearse Doherty, has called for the introduction of temporary and targeted mortgage interest relief to support households struggling with the sharp and sudden spike in interest rates.
The Donegal TD warned that many mortgage holders risk falling into arrears. Mr Doherty said: ‘This is a massive income shock for households. The Central Bank estimates that one in five households will see their annual mortgage costs spiral by more than €5,700 as a result of these rate hikes, with two in five seeing their annual mortgage costs rise by more than €3,000.
‘For so many workers and families, the spike in interest costs is too much to bear as they deal with a wider cost-of-living crisis.’
He called on the Minister for Finance to convene a meeting with the Central Bank and retail banks and ‘chart a way forward’.
The ECB interest rate was reduced to an all-time low of 0.0% in March 2016, but the bank eventually increased the rate to 0.5% in July 2022.
In December last it went to 2.5% and it now stands at 4.25%. However those on tracker mortgages in Ireland are already paying rates of up to 5.75%.
The latest rate hike was announced late last month by ECB president Christine Lagarde who said the bank’s next move to beat inflation would be guided by the data and ‘on the basis of that, we will determine whether we hike or whether we pause’.
She warned: ‘What I can assure you of is that we’re not going to cut. That is a definite no.
‘But on the other side it could be a hike, it could be a pause. And if it is a pause, it would not necessarily be for an extended period of time because, as I said, it will vary from meeting to meeting because we continue to decide on a meeting-by-meeting basis.
‘The determination is rooted in one very simple direction: 2% the target inflation rate. We want to break the back of inflation, 2% is the goal and we will get there come what may.’
Inflation fell further in June reaching 5.5% after 6.1% in May. The last hike was introduced in July, with Trevor Grant, chairman of the Association of Irish Mortgage Advisors, warning: ‘This hike, which is the ninth since last July, will add significantly to the financial stress which so many homeowners are now under.
‘Those with a tracker mortgage are now typically paying interest rates of between 5% and 5.75% as a result of today’s 0.25 percentage point increase. Tracker mortgage rates today therefore dwarf those that were in place before ECB rates start to rise.
‘Tracker mortgage holders who have not already done so should make it their priority to look at switching into a fixed-rate product as staying on their tracker rate in the current interest rate cycle could ultimately prove far more expensive.’
A week ago, Bank of Ireland announced an immediate increase to its interest rates on fixed-rate mortgages for new and existing customers on new fixed rate by 0.25%.
However, applicants who have credit approval and who draw down their mortgage by August 24 will still be able to access the previous fixed rates.
A month ago, AIB announced an increase of its fixed and variable mortgage rates in Ireland by an average of 0.46% across its AIB, EBS and Haven rates.
