Interest rate cuts are a double-edged sword

Here's what savers and borrowers need to do as interest rates enter a new era

Savers and borrowers face contrasting fortunes as the European Central Bank lopped another 0.25% off interest rates this week.

The move came after new figures showed EU inflation fell  under 2% this week for the first time in years, which is also good news for hard pressed householders.

"For homeowners with tracker mortgages, this cut would save about €12 per month for every €100,000 borrowed over a 15-year term,” says Martina Hennessy, CEO of Doddl.ie.

“However, even with recent cuts, tracker mortgage holders are still paying €437 more per month than in 2022 for an average €250,000 mortgage with 15 years remaining.”

But mortgage holders without a tracker are not guaranteed any cuts.

This is because the ECB raised rates by 4.5%, yet the main  banks passed on only 1.5% of this hike on average, she explains.

Non-bank lenders like ICS and Finance Ireland went further on the way up as they have no depositors to fleece with low rates in order to cushion the blow for savers.

“You should not expect to see every ECB rate cut passed on to non-tracker mortgage holders," Ms. Hennessy advised borrowers.  

The arrival of new lenders MoCo and Nua Money has increased competition in the Irish market where 10 lenders now compete for our business.

The good news is that rates range from 3.2% to 6.65%, so shopping around can really pay off.

This week’s cut was no surprise to analysts following reductions in June (0.25%) and September (0.6%) as inflation falls.

Yet as our table shows, rates have hardly budged from July to last Thursday – although rate cuts may yet come soon after the new cut.

And borrowers can still snap up massive savings in a very fractured market.

The cheapest loans are still less than half the price of the dearest mortgages in a gap rarely seen that presents huge savings opportunities.

So what should borrowers – and savers – do?

Borrowers

Since last July, rates have hardly budged despite a sizeable cut in  September.

Over the summer, AIB, along with offshoots EBS and Haven, did edge in front of other lenders dropping some mortgage rates to between 3.3% and 3.5%.

But these apply only to 'green' loans on 4-5yr fixed rates for homes with a BER of B or better.

The only other ‘action’ since July was ICS and Finance Ireland lowering their extremely high rates to rates that are still pretty high.

Banks may pass on some of the latest interest rate cuts soon.

But even if they don’t, you can still save €7k a year more by swapping the dearest mortgages for the cheapest.

Despite this slow pace of interest rate cuts in the current cycle,  there are bargains aplenty for savvy switchers.

Switching your mortgage is literally the most lucrative thing you can do with your household finances, potentially saving hundreds if not thousands for every minute you spend on it.

Yet still most people turn their noses up at the biggest money-making opportunity there is (see panel).

Savers

The good news for savers is that – like mortgages - the best medium term deposit rates haven’t budged much since the summer.

But, after this week’s cut and with more on the way, they may not last long at these levels.

This means you can lock into a decent rate of around 3% over two years at a time when interest rates are expected to fall.

As you can see from the table, the main banks have competitive deals over 18-months to two years, although their instant access accounts, where most people keep their money, remain ridiculously low.

These medium-term deals are well worth snapping up soon as they probably won’t last as interest rates fall.

PANEL

New research from the Banking & Payments Federation Ireland (BPFI) shows that less than a third (28%) of mortgage customers have even considered switching in the past year.

And only about one in three (34%) have looked for information on mortgage rates available in the past six months, while only 27% have researched mortgage products available in the market. 

Loan-to-value (LTV) and Building Energy Rating (BER)  figures are key to getting a good mortgage deal these days. Yet, only a handful of people even know what they are!

According to BPFI,  28% of mortgage customers don’t know the LTV ratio on their mortgage while one in four (25%) don’t know their home’s BER, the federation says.

“It is really important for consumers to inform themselves of what options are open to them…with one in five (21%) mortgage customers saying they are on a variable rate mortgage and a further 11% saying they are due to come off a fixed rate within the next year.”

However, he stressed that “switching may not be an option for everyone” depending on their circumstances.

So why are the BPFI so keen on getting people to think about switching?

The federation mainly comprises banks and mayve sees an opportunity to snap up business from the non-bank lenders like ICS and Finance Ireland who are still ‘out on a limb’ with high interest rates.

The AIB group – which includes EBS and Haven – is also now  ‘rubbing salt’ in the wound by upping the cash amount it pays to lure switchers from €2000, to €3000.

It already offers the cheapest rates, so this means you can get snap up the best deal – and get paid thousands extra to do so.