Monday, March 7, 2011

Fears banks will up ECB rate hikes | The Post

Irish banks could use an April hike in European interest rates as a way to improve their balance sheets, and push more homeowners into arrears, banking experts fear.

Last week, the European Central Bank indicated that interest rates could rise in April, with the market preparing for a 0.25 per cent increase.

This would take rates to 1.25 per cent, after almost two years at a record low of 1 per cent.

However, banking experts are predicting that banks will increase rates for mortgage customers by more than 0.25 per cent. According to financial adviser Liam Ferguson, some standard variable rates could go up by 0.35 per cent if the ECB raises rates by 0.25 per cent, thus improving the lender’s margin.

‘‘On the flip side, variable deposit rates may increase by less than 0.25 per cent for savers for the same reasons," Ferguson said.

One senior banking industry source said that further interest rate increases would put huge pressure on already overstretched households and could result in more families falling into arrears with their mortgages. ‘‘There will be some people managing today who will be tipped over the edge," he said.

Consumers with tracker rate mortgages have so far been insulated from increases in interest rates by lenders, but standard variable rate customers have already experienced significant increases in the interest they face on their mortgages.

Many banks are loss-making on the tracker portion of their mortgage book, but are contractually obliged to increase rates by no more than any ECB move on rates. ‘‘If you are stuck in one aspect of your business, you have to see what you can do on other sides to meet the political imperative of getting your act together and getting off the life support line from taxpayers," said one senior banker.

‘‘Lenders could increase charges in non-tracker loans by more than the ECB amount, but they have to match the ECB increase for tracker mortgage holders," said Frank Conway, director of the Irish Mortgage Corporation.

‘‘The reverse happened when rates were falling two years ago, where some lenders only passed along 0.5 per cent of a 0.75 per cent drop in interest rates."

Conway said that banks had no option but to look for ‘‘every

angle to increase charges and reduce costs’’.

‘‘I think the banks will have little choice but to do all they can to reverse their financial situations and return to profit as soon as possible," Conway said.

Karl Deeter, of Irish Mortgage Brokers, also expects banks to increase standard variable rates by more than the ECB hikes rates.

He said it was likely that banks would raise rates ‘‘irrespective of what the ECB do’’, given the gap between the cost of funds that banks face and lending rates.

Lenders remain tight-lipped on rate hikes, with most saying that interest rates remain under review.

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