ECB Mortgage Rate Saving? Overpay Your Mortgage

Holders of tracker mortgages were advised to consider overpaying their mortgages after the European Central Bank lowered it’s key interest rate on Thursday. The reduction could see an extra €15 per month in the pockets of mortgage holders for every €100,000 outstanding on their mortgages.

Instead of keeping the difference thanks to lower repayments, Michael Dowling of the Independent Mortgage Brokers’ Federation advised mortgage holders to continue to pay their normal amount each month. The extra €15 then counts as an overpayment, which will not only reduce the outstanding balance on the mortgage faster, but will also reduce interest on the mortgage. This then lowers repayment amounts for the following year.

The length of time your mortgage runs will also be affected by overpayments. An overpayment of €50 each month when the interest rate is 3.75% not only saves you €12,000 in interest payments but also reduces the length of a 30 year mortgage to just 25 years. Overpaying €100 reduces the mortgage even further, taking it down to 22 years and saving you €20,000 according to Dowling’s calculations.

With the reduction in the key interest rate, people holding variable rate mortgages are now paying up to €400 more each month than trackers for comparable-sized mortgages. However many lenders, including KBC Bank and EBS, have yet to decide whether they will be passing on the ECB’s rate cut to their customers.

Bank of Ireland and Irish Bank Resolution Corporation (formerly Irish Nationwide) are also considering whether to reduce their rates following the ECB’s cut.

Furthermore, EBS has refused to comment on whether its variable rate will be reduced. Although it said it was reviewing its rates, EBS currently offers one of the highest rates on the market, at 4.33%. Permanent TSB and Ulster Bank have reduced their variable rates following the key rate change, although Ulster Bank still offers the highest variable rate on the market, at 4.5%.

The National Irish Bank stated that its parent bank, the Danish-owned Danske Bank, does not use the ECB to assess its cost of funds as Denmark is not part of the Eurozone. Nevertheless, 75% of NIB’s mortgages are tracker mortgages and are therefore linked to the ECB rate. NIB currently charges 4.44% on its variable rate mortgages.

A second cut in interest rates is expected by the end of the summer, dropping to 0.5% and bringing the Eurozone into line with interest rates in the UK and US.

If you hold a tracker mortgage, you will need to advise your bank of your intention to continue repaying at the same rate. If you do not, your bank will automatically reduce repayments on tracker mortgages when the new interest rates come into effect.

Article by Loans Ireland. Information on loans and mortgages in Ireland.