Q&A: What it will mean for your home loan after the ECB raises lending rates

A: The Governing Council of the ECB previously indicated that it would raise its key interest rates by a quarter of a percent. ECB President Christine Lagarde said that would be followed by a bigger hike in September if inflation remained high. Eurozone inflation is 8.6%, so a 0.5% rate hike is expected in September. However, some reports indicate that a hike of half a percent could be announced today.

Q: Why are prices increasing?

A: The ECB hopes that by raising rates it will control inflation. The idea is to weaken demand by making borrowing more expensive. It is hoped that this will encourage households and businesses to suspend spending, which will ease price pressures. The ECB is expected to raise both its deposit rate – the interest it charges banks for holding money – and its refinancing rate. The refinance rate is currently zero, and it is the rate that determines what you pay on your tracker. The ECB deposit rate is minus half a percent. However, paying banks for their savings may encourage them to pay higher deposit rates, which in turn would reduce spending. But others think it’s a terrible time to raise rates and that it will only push the EU into recession.

Q: I’m on a tracker, so when will my loan rate go up?

A: The interest rate you pay on your tracker is contractually linked to the ECB refinancing rate. You pay a margin, usually 1pc, plus the ECB refinancing rate. So if the ECB refinancing rate goes up, you pay more. The state’s 250,000 tracker customers will get a month’s notice when their bank charges them higher mortgage interest after the ECB raises its rate. Every quarter percent increase in ECB rates will cost €30 more in monthly repayments for a €250,000 25-year mortgage. This means that this week’s rate hike could cost an additional €360 over a full year.

Q: What will happen to variable rates?

A: This is the big imponderable. There are 200,000 variable mortgage holders. Banks have the capacity to absorb ECB rate hikes of at least half a percent without passing the cost on to floating rate customers, according to TSB permanent boss Eamonn Crowley. According to brokers Michael Dowling, Bank of Ireland and Permanent TSB charge such high variable rates – up to 4.5% – so they can afford to absorb some pain on variable costs. The variable and other rates in this country are much higher than those practiced in the other countries of the euro zone, so it is possible that the banks are generous.

Q: I am on a fixed rate. What’s happening to me?

A: You can keep this rate until the end of your term. So if you fixed at 3% for three years, you pay that rate for three years. At the end of the fixed period, be prepared that the fixed rates have increased in the interval, as well as the variable rates.