The European Central Bank (ECB) has increased interest rates by 50 basis points in its first rate hike for 11 years, a long-expected move that could increase your mortgage repayments.

The EU financial regulator adjusted its basic lending rates as part of efforts to curb inflation, which ticked up to 9.6% across Europe and 9.1% in Ireland last month, as the continent weathers the fallout from the war in Ukraine, energy prices hikes and supply chains issues.

The ECB had warned that it would increase lending rates by 25 basis points this month following a three-year period during which it lent at 0% and paid institutions to deposit money due to a deposit facility of -0.5%. The governing council decided on a more aggressive 50 basis points hike.

It also suggested further rate increases may be necessary to ensure inflation returns to its 2% target over the medium term. The higher interest rates will take effect from July27.

Mortgage holders on tracker and standard variable rates will see their repayments rise as a result of the decision as their payments are linked to lending rates, with an estimated 300,000 homeowners on trackers and a further 200,000 on variable rate mortgages.

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So how will the rate hike affect mortgage repayments?

Joey Sheahan, head of credit at broker MyMortgages.ie and author of The Mortgage Coach, said that thousands would scramble to "fix their rate now". Sheehan believes that some homeowners with larger mortgages would see their repayments rise by more than €100 per month.

"All eyes will now be on the lenders to see how they react to the ECB’s announcement. "While switching activity has been busy this year to date, we expect a flurry of activity over the coming months as people move to try to lock in fixed rates and somewhat shield themselves from further increase rate rises."

Tracker

A household with a €250,000 mortgage with 25 years left on a tracker rate that will increase from 1% to 1.5% will pay an extra €47 per month, €564 per year, or €14,100 over the life of the mortgage.

A household with a €500,000 mortgage with 25 years left on a tracker rate that will increase from 1% to 1.5% will pay an extra €115 per month, €1,380 per year or €34,500 over the life of the mortgage

Variable

A household with a €250,000 mortgage with 25 years left on a variable rate that will increase from 3.2% to 3.7% will pay an extra €67 per month, €804 per year or €20,051 over the life of the mortgage, with total interest repaid rising from €113,510 to €133,560.

A household with a €500,000 mortgage with 25 years on a variable rate will pay an additional €134 per month, €1,608 per year or €40,200 over the life of the mortgage, with total interest repaid rising from €227,020 to €267,120.

Sheahan advised homeowners to switch to a long-term fixed rate, with borrowers of a 60% loan-to-value mortgage able to secure a fixed rate of 2.5% over 25 years.

"This is somewhat of a no brainer for many people and we would argue that every borrower should be considering long term fixed rates now, even if they are currently on a fixed rate, as there is often no breakage fee depending on lender. Even if there is, the savings you can make generally outweighs the cost of any breakage fee payable," he said.

Martina Hennessy, managing director of doddl.ie, commented that even borrowers on short-term fixed rates will eventually feel the pinch when they roll over into a higher rate environment. 

"For these, I would advise checking if there is a penalty to break out of your current fixed rate if you want to lock in for longer," said Hennessy. 

“Rising funding costs for mortgage lenders continue to pose a threat to mortgage rates in general, with upward movement on rates announced by a number of lenders in the last two months and more expected."  

(Pic: Getty Images)