Mortgage interest rate predictions

sunnyday1234

Hello everyone

I think that we all agree that rates are going up. Just curious to find out peoples opinions on

1. how many hikes in the next 2 years from the ECB
2. Will irish banks pass them all on ?

This is just predicitions obviously and no one knows for sure what will happen

godtabh

sunnyday1234 wrote: »

Hello everyone

I think that we all agree that rates are going up. Just curious to find out peoples opinions on

1. how many hikes in the next 2 years from the ECB
2. Will irish banks pass them all on ?

This is just predicitions obviously and no one knows for sure what will happen

1. Who knows
2. Yes

Samuel T. Cogley

1. Who knows
2. To a point - the pressure may get to the point that Irish banks are forced not to take the piss quite so much.

quadrifoglio verde

We're at the lowest they've ever been and unless they go negative, they're either going to stay the same or increase.
If you want peace of mind that your repayments are going to stay the same for the next two years, I'd fix.
Ecb rates could stay the same over the next two years, but that won't stop the banks rising the variable rate if they want to.

As for question 2?
A rise in ecb rates will cause a rise in mortgage rates.

topcatcbr

1 the ECB target is for 2% So as long as the economy continues to recover yes. As for how many times who knows. Its not about how many times it goes up but by how much. I predict 1% in the next 2 year.

2 Absolutely. The Irish banks like to be at about 4% with discounted prices for new business about 1.5% below that.

Tigerandahalf

It will be interesting to see how it plays out.

I think 50% of residential mortgages are on trackers from what I read.
The banks may leave variables alone and just rise the trackers.

Given how tracker mortgages have had a good few low interest years there may not be the political pressure to keep them from going up. People will say you had low rates for years.

quadrifoglio verde

Tigerandahalf wrote: »

It will be interesting to see how it plays out.

I think 50% of residential mortgages are on trackers from what I read.
The banks may leave variables alone and just rise the trackers.

Given how tracker mortgages have had a good few low interest years there may not be the political pressure to keep them from going up. People will say you had low rates for years.

You think banks seeing the opportunity to increase profit won't take that opportunity?

They'll be like men at closing time in coppers grabbing any female that moves.

zl1whqvjs75cdy

Don't see it in the next year. Too many unknowns, brexit, french elections etc. Banks will certainly pass it on. Only slight saving grace will be when rates go up returns on bonds might go up too. May lead to the insurance market levelling out. Or not. Who knows.

mickmac76

No doubt it will be interesting. If nothing happens to spook the economy ( a Le Pen victory in France or indications of a very hard Brexit ) then I can see interest rates rising to around 1.5 or 2.0% over the next couple of years. Tracker mortgages will raise with them but I wouldn't be surprised if banks don't pass on the first couple of hikes to variable rate holders.
I'd be surprised if there was any rises this year. Most likely to start in about 12 months.

Yourself isit

I doubt that the difference between trackers and retail rates will continue to be so divergent. If ECB rates go up 1-2% then that could be added equally to both trackers and variable rates, but historically they have been much closer, and more money from trackers will allow flexibility on variable rates.

It all depends on the level of competition though.

godtabh

there has been pressure on banks to reduce the rates based on rate cuts of the past. that never really happened. Once the rate begin to go up the banks will match them.

Yourself isit

godtabh wrote: »

there has been pressure on banks to reduce the rates based on rate cuts of the past. that never really happened. Once the rate begin to go up the banks will match them.

Not necessarily. Trackers will go up. That's the contract. Therefore banks will be generating more income from outstanding loans. Depending on the level of competition they can use this to reduce the spread between trackers abd variable rates.

Lumen

Yourself isit wrote: »

Not necessarily. Trackers will go up. That's the contract. Therefore banks will be generating more income from outstanding loans.

But revenue is not profit. Banks make profit from NIM (net interest margin, which is essentially rate on loans - cost of funds). Cost of funds is critical. If interest rates go up, cost of funds tends to go up, they're highly correlated.

For instance, random graph from Google images.

Samuel T. Cogley

This is whats confusing me too. My tracker is +1.25% above base IIRC but whatever that's not important.

If the base rate is 0.75% then my interest rate is 2%. How does the rate going to 2% and my rate now being 3.25% affect the profitability of my tracker? I'm probably being dumb and missing something in the maths here.

Although I do think we'll see something happen with trackers where variables are let sit to a certain degree and at a certain point - if only to encourage people off trackers and on to discounted fixed rates to try and get people off trackers for short term gain.

nhunter100

Tigerandahalf wrote:

Given how tracker mortgages have had a good few low interest years there may not be the political pressure to keep them from going up. People will say you had low rates for years.

They can't put up a tracker mortgage unless the ECB raises the base rate.

Lumen

Samuel T. Cogley wrote: »

This is whats confusing me too. My tracker is +1.25% above base IIRC but whatever that's not important.

If the base rate is 0.75% then my interest rate is 2%. How does the rate going to 2% and my rate now being 3.25% affect the profitability of my tracker? I'm probably being dumb and missing something in the maths here.

Simplistically, not much, in your single case.

On the other hand, higher interest rates is going to cause more stress and defaults, and that ought to trigger and write down of the asset value, which will presumably get booked as a loss.

Taken to it's logical extreme, would you want to hold a bunch of Irish tracker loans yielding 10% if your cost of funds were 8.75%?

Yourself isit

Lumen wrote: »

But revenue is not profit. Banks make profit from NIM (net interest margin, which is essentially rate on loans - cost of funds). Cost of funds is critical. If interest rates go up, cost of funds tends to go up, they're highly correlated.

For instance, random graph from Google images.

Sure you've said this before. Nevertheless there's a much bigger difference between variable and tracker rates in Ireland than anywhere else. Irish banks have access to the same cost of funds so why is that

Samuel T. Cogley

Lumen wrote: »

Simplistically, not much, in your single case.

On the other hand, higher interest rates is going to cause more stress and defaults, and that ought to trigger and write down of the asset value, which will presumably get booked as a loss.

Taken to it's logical extreme, would you want to hold a bunch of Irish tracker loans yielding 10% if your cost of funds were 8.75%?

Honestly, absolutely no idea. I appreciate the answer, but I will have to expose my ignorance here - I've not idea of this side of things.

Lumen

Yourself isit wrote: »

Sure you've said this before. Nevertheless there's a much bigger difference between variable and tracker rates in Ireland than anywhere else. Irish banks have access to the same cost of funds so why is that

Because we have a broken, anti-competitive, dysfunctional banking system.

The difference isn't just between trackers and variable, it's between old business and new. Irish banks are milking the subset of their variable rate customers who cannot refinance due to changes in lending standards and personal circumstances.

None of this NIM stuff is a secret. It's all here in AIB's public reports, for instance:

https://aib.ie/content/dam/aib/investorrelations/docs/resultscentre/annualreport/annual-financial-report-2016.pdf

Geuze

topcatcbr wrote: »

1 the ECB target is for 2% So as long as the economy continues to recover yes. As for how many times who knows. Its not about how many times it goes up but by how much. I predict 1% in the next 2 year.

2 Absolutely. The Irish banks like to be at about 4% with discounted prices for new business about 1.5% below that.

The ECB target for inflation is 2%.

There is no target for interest rates.

sunnyday1234

if rates went up 2% then the AIB with a LTV of less that 50% would be 5.1%
Those kind of rates would be enough to crash the market in my opinion

quadrifoglio verde

Samuel T. Cogley wrote: »

This is whats confusing me too. My tracker is +1.25% above base IIRC but whatever that's not important.

If the base rate is 0.75% then my interest rate is 2%. How does the rate going to 2% and my rate now being 3.25% affect the profitability of my tracker? I'm probably being dumb and missing something in the maths here.

Although I do think we'll see something happen with trackers where variables are let sit to a certain degree and at a certain point - if only to encourage people off trackers and on to discounted fixed rates to try and get people off trackers for short term gain.

The bank loaned you your mortgage at 1.25% above the base rate.
Mortgages by there nature are long term. However the banks don't borrow in the long term. They borrow in the short term and keep refinancing as they can get a better rate (well that's the idea).

Say the bank can only borrow at 2.5%. ECB at 0.75 means they're loosing money. If the rate increases to 2% and they can still borrow at 2%, then they're making nice chunky profit on your mortgage.

That is my limited understanding as to why banks are losing their shirts on trackers

rsynnott

sunnyday1234 wrote: »

if rates went up 2% then the AIB with a LTV of less that 50% would be 5.1%
Those kind of rates would be enough to crash the market in my opinion

New mortgages are, at least theoretically, stress tested to +3%.

Lumen

quadrifoglio verde wrote: »

Say the bank can only borrow at 2.5%. ECB at 0.75 means they're loosing money. If the rate increases to 2% and they can still borrow at 2%, then they're making nice chunky profit on your mortgage.

That is my limited understanding as to why banks are losing their shirts on trackers

But their cost of funds is not 2.5%, it's well under 1%.

From the AIB report I linked to above:

Yourself isit

Lumen wrote: »

But their cost of funds is not 2.5%, it's well under 1%.

From the AIB report I linked to above:

That's the cost of their savings accounts in general, right? When they put money on deposit with the ECB they earn interest.

Lumen

Yourself isit wrote: »

That's the cost of their savings accounts in general, right?

Funding comes only partly from deposits. Banks don't lend deposits; deposits are created from lending.

Yourself isit wrote: »

When they put money on deposit with the ECB they earn interest.

That interest rate (if you mean the overnight rate) has been mildly negative since June 2014.

Geuze

quadrifoglio verde wrote: »

That is my limited understanding as to why banks are losing their shirts on trackers

Even with just 0.75% or 1% interest income from a tracker, that still covers the costs of funds.

Now, whether the tracker loans contribute enough to cover overheads, I'm not sure.

But they do cover the cost of funds.

Bob24

rsynnott wrote: »

New mortgages are, at least theoretically, stress tested to +3%.

Which in the hypothesis sunnyday1234 mentioned would mean stress testing them for 8.1% interested rate. That could indeed crash the market IMO as much fewer household could get large enough mortgages to sustain current prices.

But we're no there yet.

Lumen

Geuze wrote: »

Now, whether the tracker loans contribute enough to cover overheads, I'm not sure.

Performing loans require no administration. The costs come from the non-performing ones (and retail banking, which is inefficient due to branch network baggage). Obviously you're going to lose money if you lend it and it doesn't get paid back. :pac:

Margins from new lending are chunky. As the legacy book gets run down, overall profitability will improve and there will be space for competitive pressures to drive down variable rates. That could counteract rising rates, were it not for the likely increase in distress on old loans. But maybe non-banks will own those NPLs by the time rates rise appreciably.

Yourself isit

Lumen wrote: »

Funding comes only partly from deposits. Banks don't lend deposits; deposits are created from lending.

I'm trying to work out the "cost of funds here". A bank that creates a loan for person A who buys a house from B (in the same bank) will have the mortgage as an asset and B's deposit as a liability. Right?

That interest rate (if you mean the overnight rate) has been mildly negative since June 2014.

OK.

Lumen

Yourself isit wrote: »

I'm trying to work out the "cost of funds here". A bank that creates a loan for person A who buys a house from B (in the same bank) will have the mortgage as an asset and B's deposit as a cost. Right?

Yes, although deposits is only one source of funds. This might be relevant, from 2015.

Central Bank Report: Influences on SVR Pricing in Ireland
http://www.finance.gov.ie/what-we-do/banking-financial-services/central-bank-report-influences-svr-pricing-ireland