AIB moves first among Irish banks to raise fixed home rates following ECB hikes

AIB is raising the cost of new fixed-rate mortgages by 0.5 of a percentage point, becoming the first Irish bank to make such a move since the European Central Bank (ECB) started hiking its interest rates in July.

The largest Irish mortgage lender, led by chief executive Colin Hunt, said increases will apply across its AIB, EBS and Haven brands after close of business on Friday. Customers who already have loan offers will, until November 14th, be able to draw down their new mortgage at previous rates, the bank said. AIB’s standard variable rates are unaffected.

The increases move the rates on AIB’s five-year fixed product, for example, for new mortgages with a loan-to-value (LTV) of 50 to 80 per cent to 2.95 per cent, while its 10-year loans, under the same LTV, move to 3.7 per cent.

The cheapest fixed-rate product across the AIB group is the 2.5 per cent rate that applies to Haven’s four-year green mortgages, open to owners or buyers of homes with an energy rating of B3 or higher.

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Meanwhile, depositors, who have largely been earning nothing on money placed with Irish banks in recent years, will be offered a rate of 0.25 per cent if they place at least €15,000 in a one-year fixed-term product that AIB is launching at the end of November, the bank said.

The ECB’s governing council decided last month to increase its main lending rate by 0.75 of a percentage point to 1.25 per cent, following a previous 0.5 of a point move in late July, as the central bank seeks to rein in soaring inflation.

Some governing council members, including the heads of the Latvian, Slovak and Austrian central banks, have openly backed another 0.75 of a point increase when the ECB meets in less than two weeks’ time, with further increases on the horizon over the coming months.

Non-bank mortgage lenders Finance Ireland, ICS Mortgages and Avant Money have each already increased the cost of certain mortgage products in recent months, as they are reliant on wholesale and bond market funding for their loans. Market rates have jumped this year amid speculation among investors over how far the ECB will go.

Meanwhile, the gap between the average interest rate on a new Irish mortgage and euro zone rates has narrowed significantly in the past year, as continental European banks are more reliant on market funding for home loans. The Irish average stood at 2.64 per cent in August, down 0.1 of a point on the year, while euro zone rates have increased by 0.94 of a point to 2.21 per cent over the same period, according to Central Bank data published on Thursday.

Irish banks are among the best-placed lenders in Europe to benefit from ECB rate hikes, according to analysts. That is because their earnings are more dependent on interest from loans than most of their European counterparts, which generate large amounts of their income from fees and commissions.

However, lenders face a tricky balancing act as they seek to push up their interest income by increasing rates. If they move too far, they risk pushing vulnerable households, already facing a cost-of-living crisis, into default.

Bank of Ireland set aside €47 million in the first half of the year to cover potential loan losses at a time of “economic uncertainty, primarily driven by Russia’s invasion of Ukraine, inflationary pressure and interest rate expectations”. AIB has also signalled that it plans to make provisions to cover similar risks in the second half of the year.