Interest Rate Rises, What does this mean for me?

 

In MABS, we receive a lot of great questions about money matters and tackling debt. Questions that we know many people want to ask, but don’t know whom to ask or where to start.   

MABS is here to help.    

The focus of this week’s MABS blog is interest rate increases. It’s something that most of us have not had to think about for a long time, maybe ever, but it can mean your loan or mortgage repayments are set to increase.  

In this blog, we’ll cover:   

  • What is an interest rate?  
  • Why are interest rates increasing?  
  • Do I need to adjust my repayments? 
  • What happens if I don’t adjust my repayments?  
  • If I’m on a fixed rate, will my repayments change? 
  • I’m worried I can’t afford the increase in my repayments, what do I do? 

 

Background 

The European Central Bank (ECB) is has increased the baseline interest rate as of July 21st. This might have an impact on mortgage holders and personal loan borrowers by increasing the amount they will have to pay back each month.  

We have not seen a baseline interest rate increase like this for some time. The biggest impact will be experienced by homeowners on tracker mortgages, as tracker mortgage rates are directly tied or linked to the ECB baseline rate. Borrowers on tracker mortgages will not have seen an increase in their interest rates for several years. 

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 percentage above the ECB baseline rate.
 

What is an interest rate?  

Interest is the cost of the credit charged by the credit provider, such as, 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 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, such as 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 6% or 7%. 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, and you can only make limited additional payments 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%). 

 

Why are interest rates increasing?  

All interest rates from retail lenders include the European Central Bank (ECB) charged rate plus their own margin. This is one of the ways how banks generate income.  

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

Some lenders have indicated that they may absorb the first increase,  which is good news as it may give some borrowers extra time to prepare for the increase in repayments. 

 

Do I need to adjust my repayments? 

A notice will be sent by your lenders of any changes to your mortgage rates or loan 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 bank or credit union, as you can often miss important information like this one about interest rate changes. If you’re worried about your finances, then don’t ignore it. The earlier you tackle the situation, the better. Remember, you are not alone, and advisers in MABS are ready and able to support you with free, non-judgemental, and confidential advice.   

So, what can happen when interest rates change? We have included some examples below containing fictional figures for demonstration purposes only to show what can happen! 

  

Example

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

Bank: Blogg Bank 

Payment Plan: She pays €957.68 on the 25th or each month under the terms of her mortgage agreement.   

ECB Increase: After the ECB increased the European rate by .25% Blogg Bank also increased her mortgage rate.  

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

What went wrong: Mary was sent 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 for her mortgage. 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?  

If you have a Credit Union loan that is paid by direct debit, the direct debit may not increase automatically with an increase in the loan rate. You will need to check this with your Credit Union directly. 

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 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, it will cause the direct debit to 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 loan or mortgage to go into arrears.  

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

 

Example 

Name: Mary Walsh  

Loan: Credit Union with a balance of €3,243.70 outstanding.  

Payment Plan: Mary pays €156.23 each month by direct debit to the credit union on the 20th of each month.  

New Amount: The Credit Union wrote to Mary and advised her that her loan amount would increase to €159.03 due to the interest rate increase.  

What went wrong? As the direct debit with Mary’s Credit Union was for a fixed amount, unlike her mortgage for a variable amount, she continued to pay €156.23 each month.  There were 2 further increases in the interest rate over the next 6 months. Still, Mary continued to pay €156.23 instead of what was due each month following the increase to €168.45. This meant that arrears started to build up on Mary’s loan.  Eventually, Mary received a letter from the Credit union to say that her loan was 1 month in arrears. She could not understand this as she had paid each month. The Credit Union then advised her that they had written to her about the interest rate changes and to contact them, which she had not done. 

 

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. 

 

I’m worried I can’t afford the increase in my 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.  

  

We hope we’ve cleared up any confusion around the impending interest rate rises.  Do you have a question for MABS to research? Get in touch and let us know 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 9am to 8pm, WhatsApp 086 035 3141 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, WhatsApp and in-person in locations nationwide.