Monday, December 22, 2008

How much interest are we saving?

Since October the ECB has cut their main refinancing rate from 4.25% to 2.5%. This rate is the driver of variable and tracker mortgage interest rates in Ireland. So how much are households benefitting as a result of the rate cuts?

The Central Bank reports in their Statistical Bulletin that in October there was about €123.5 billion of residential mortgages outstanding in Ireland. Of this about €90 billion was for principal dwellings and €33 billion was for buy-to-let residential properties.

Let's look at the mortgages for principal dwellings. Some of these properties are on fixed rate mortgages so the interest rate changes have no impact on the repayments. In 2007 Bank of Ireland reported the following breakdown for its mortgages

  • Fixed - 26%
  • Variable Tracker - 68%
  • Standard Variable - 6%

Bank of Ireland represented about 20% of the overall mortgage market so we can take them as being fairly representative. They did note, however, that fixed rates of between 2 and 5 years were becoming increasing popular. According to the Department of the Environment 38% of new loans issued in the second quarter of 2008 were on fixed interest rates.

We'll take it that 66% of mortgages are on tracker or standard variable rates. Although a conservative estimate it means that €60 billion of household mortgages now have lower interest payments. The savings?

Let'ss assume that the outstanding debt must be paid off over a 20 year term and that the average interest rate has dropped from 5.75% to 4%.

This means the monthly repayment on this debt has fallen by about €58 million per month. Over a full year this will give a saving of close to €700 million which will increase if interest rates fall again as expected. And this excludes savings in the buy-to-let sector which will bring the full amount closer to €1 billion. Now we're stimulating!

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