The decision by the European Central Bank to cut interest rates from 3% to 2.75% is its fifth reduction since last June.
But people with variable mortgages haven’t seen the benefit of the cuts.
There are a number of reasons for this.
Banks had not put up variable loans in line with ECB decisions when rates began to rise in 2022, so it follows that they would be unlikely to reduce them in line with central bank cuts.
However, there is a broader policy shift by lenders to encourage people to take up fixed loans instead of variable products.
Mortgage broker Michael Dowling says “everyone has reduced their fixed rates over the past three or four months.”
“Variable rates have not fallen since last June. People should look at the options in terms of fixed rates.”
Already PTSB has cut its four-year fixed rate to 3% whereas its variable rates range from 4.4% to 4.7%.
As the ECB continues to reduce rates Michael Dowling says “all of the fixed rates will head to 3%”.
There are reasons why banks are keen to see mortgage holders remaining on fixed rates.
Firstly, it locks them in as customers for a number of years.
Secondly, it reduces the risk profile for banks as they know mortgage holders will be on the same repayments over the coming years regardless of the European Central Bank decisions.
That means customers are less likely to face difficulties with monthly payments if rates rise quickly.
While mortgage holders who have fixed rates benefit from peace of mind, the disadvantage is that customers can’t freely make additional capital repayments on their loans.
If they do, they face additional fees.
Read more:
ECB cuts rates and leaves room for more easing
The downside of declining interest rates is that savers will face falling returns.
That has already been clear to customers who have money in demand accounts.
But there is an option to put money into a fixed savings product too.
There is over €160 billion on deposit by Irish households
Much of it is in accounts that pay little or no interest.
That means the bank is the winner and the customer is the loser.
