Since July 2022, we’ve seen ten (at the time of publishing -15/07/2024) increases in the baseline rate set by the European Central Bank, rising from 0% to 4.5%. Interest rates have now fallen to 4.25% as of June 2024. Interest rates are not something most of us have had to worry about for a long time or ever. However, now they are increasing some mortgage repayments every couple of months. This can put a real strain on your finances. We are here to help. In this blog, we will explain why interest rates are rising and how they can impact you.

 

Background 

The European Central Bank (ECB) has been increasing the baseline interest rate since July 21st, 2022. This has affected mortgage holders and personal loan borrowers by increasing the amount they will have to pay back each month. In MABS, it has been one of the top reasons for clients to contact us in the last two years.

We have not seen baseline interest rate increases like these for some time. Homeowners on tracker mortgages have experienced the biggest impact. Tracker mortgage rates are directly tied or linked to the ECB baseline rate. Those in mortgage arrears as they are usually on a variable rate.

It’s important to note that lenders in the State have been moving the interest rate they charge on other loan products over several years. The rate charged for different loan products is up to the lender and is normally a certain percentage above the ECB baseline rate.

What is an interest rate?  

Interest is the cost of the credit charged by the credit provider. For example, your bank, credit union, or credit card provider. An interest rate is the stated rate of interest charged. This is usually shown as Annual Percentage Rate (APR) or sometimes seen as the Annual Percentage Rate Charged (APRC) for mortgage loans.

The CCPC define an APR as the annual rate of interest you will be charged on a loan. It takes account of all the costs involved over the term of the loan. This includes any set-up charges and the interest rate. You can use the APR to compare different loans, as long as you compare them over the same term, for example, 3-year loans.

 

Mortgage Interest Rates

Mortgage interest rates can range from 1.5% up to 10%. They are offered on either a fixed-term or variable rate.

Fixed rates mean your payments are the same for the duration of the fixed period. You can only make limited additional payments as outlined in your mortgage contract.

Variable rates mean you’ll have a basic payment you need to pay. However, you can pay more as often as you like. As the name suggests, variable rates vary over time depending on many factors. One of these factors can be the ECB baseline interest rate.

Another mortgage option you may have that will be affected by the ECB interest rate increase will be those on an interest-only period. This is where you and your lender have agreed that you only pay the interest on the mortgage for a specified period. If you are in an interest-only period, it is likely that your repayments will increase; again, your lender will notify you.

Tracker mortgages

As mentioned earlier, if you have a tracker mortgage, the interest rate will also be affected as the interest rate directly follows the ECB rate plus a margin (usually 1%). Those on tracker mortgages have seen their repayments increase by hundreds of euro per month since July 2022. Some have opted to fix their rate and forego their tracker rate to secure regular payment amounts.

 

Why are interest rates increasing?  

All retail lender interest rates include the European Central Bank (ECB) charged rate plus their own margin. This is one way banks generate income.

The ECB rate has been at a record low for over a decade due to the Global Financial Crisis of 2008. Generally speaking, central banks increase interest rates as a way of controlling inflation. It works by helping to reduce demand in the economy due to higher interest rates.

 

Do I need to adjust my repayments? 

Your lenders will send a notice of any changes to your mortgage rates. You need to keep an eye out for that. This notice will let you know when the new interest rate will start and how much your repayments will increase.
This notice will also inform you if you need to adjust your repayments or if they will be done automatically. As most loans and mortgages are paid by direct debit, the date listed on this notice will be the date of your usual monthly direct debit.

Important: Don’t ignore letters or correspondence from your lenders. You can often miss important information like this one about interest rate changes.

If you’re worried about your finances, don’t ignore it. The earlier you tackle the situation, the better. Remember, you are not alone. MABS advisers are ready and able to support you with free, nonjudgmental, and confidential advice.

So, what can happen when interest rates change? We have included an example below containing fictional figures for demonstration purposes only.

 

Example

Name: Mary Walsh
Mortgage: Outstanding balance of €155,670

Bank: Blogg Bank

Payment Plan: Under the terms of her mortgage agreement, she pays €957.68 on the 25th of each month.

ECB Increase: After the ECB increased the European rate by 0.25%, Blogg Bank also increased its mortgage rate.

New Payment Amount: This meant that her loan repayment increased to €960.03 each month.

What went wrong: Mary received a letter from her bank informing her of this increase, but she threw it in the bin. On the 25th of the next month, when her mortgage was due, Mary only had €958.00 available. As a result, Mary missed her payment and was charged for a missed direct debit of €13.50.

 

What happens if action is required, and I do nothing?  

A couple of things can happen if you don’t adjust your repayments. If your direct debit or standing order is for the same amount each month, you can fall into arrears (or further arrears) on your loan/mortgage by the difference between your usual monthly payment and the new payment amount. This can build up over time, and your lender will make contact to tell you that you’re in arrears.

If your lender informs you that you don’t need to adjust the payment and the direct debit will increase automatically from the stated date, and you don’t have enough money in your account to cover it, the direct debit will bounce. Your bank will charge you for the direct debit as there were insufficient funds in your account to cover the payment. The lender may attempt to take the direct debit up to 5 days later. You will be charged again if there are still insufficient funds, and the direct debit may be cancelled. Again, this can cause your mortgage to go into arrears.

If you have been in arrears and have a repayment plan in place and miss a payment, it could affect your arrangement. So, in turn, if you know you won’t be able to make your payment, contact your lender as soon as possible. If you feel you can’t talk to your lender, contact MABS.

You can read more about how direct debits work in our blog.

 

 

If I’m on a fixed rate, will my repayments change? 

If you are on a fixed-rate payment, your repayments will not change until the end of the fixed period. Before your fixed-rate period ends, your lender will contact you to advise you of the interest rate you will automatically move to if you don’t take any action.
If you are currently in a repayment plan with a fixed interest rate that is coming to an end, you may be a bit shocked by your new interest rate or repayment amount.
If you know you won’t be able to make the repayments, contact your lender or MABS to discuss your options.

 

I’m worried I can’t afford the increase in repayments; what do I do? 

When you receive your notice from your lender, and you know that you will not be able to afford the increased payments, then contact the lender to explain your situation. If you cannot speak with your lender, contact MABS, and we can work with you to see what options are available.

 

Contact us

We hope we’ve cleared up any confusion about the interest rate rises. Do you have a question for MABS to research? Contact us at mabs@ciboard.ie.

If you have a query for one of our advisers or are struggling with your debts, you can call the MABS National Helpline on 0818 07 2000 Monday to Friday, from 9 am to 8 pm or find the contact details for your local office.

Disclaimer: This blog does not represent legal advice and is intended for guidance only. If you are concerned about your current or future personal financial situation, then please contact an adviser from MABS. Advisers are available by phone, email and in person in locations nationwide.

Note: We welcome references to and use of the content in this blog. However, please reference MABS and link said content if you choose to do so.

Originally posted: 26/07/2023

Last updated: 17/07/2024