Ralph Benson

DONE WELL, CENTRAL banking is pretty bland stuff. No surprises. Such is the case for next week’s European Central Bank announcement on interest rates.

The people in grey suits are scheduled to spend two days in meetings, emerging at lunchtime on Thursday to confirm that European interest rates will move from 2.25% to 2.5%. As I write, 99.2% of bets on Polymarket are for a rise of 0.25%. You’d be brave to bet against.

This increase, the second since June, will end a long period from September 2023, during which rates were either falling or held steady. The change has implications for your mortgage, your cash and your investments.

The markets are jittery

Eurozone inflation numbers sealed the deal. On Tuesday, the announcement came that inflation across the union has climbed to 3.3%, up from 2.9% in July. You know why: the cost of energy is up 14.3% versus last year – and you need energy for transport, food, industrial goods, and all the rest.

On top of that, investors in the global bond market have the jitters about the extent of government debt across the globe. This might sound duller than a central bank announcement – but you’re going to be hearing a lot more about it over the coming months, and it just might get spicy.

Bond investors are demanding to be paid more to own the bonds of highly indebted countries like the US and the UK. Ireland isn’t in the firing line these days: after Germany and the Netherlands, we pay the third-lowest rate in the Eurozone for government debt – a situation almost unimaginable 15 years ago. But watch France, which needs to pass a budget in the coming weeks, and could well see a spike in the amount it’s forced to pay in order to borrow. Rising bond yields increase costs for many lenders, which filters through into the mortgage market for you and me.

It’s already happened in the US. The interest cost on the $40 trillion federal debt pile costs more than either the military or Medicare, and mortgage holders are paying around 6% on their loans. US federal debt, which has doubled in a decade, could well provoke a global crisis. It’s owned by countries and investors all over the globe, and at some point they will get indigestion.

What should you do?

Back in Ireland, there is plenty you can do to optimise your finances for the new environment.

First, look at your mortgage.

So far, the big three Irish banks have held mortgage rates steady. But when one moves, it’s likely the rest will soon follow – and we’ve already seen other lenders like ICS, Nua and MoCo shift rates up several times this year.

There are other factors too. The much-ballyhooed Personal Investment Accounts, due to be (re)announced in the budget next month, could reduce the cash deposits in which Irish banks luxuriate. If so, that would increase the cost Irish banks have to pay for deposits, which they use to lend money. It all points to further rate rises.
If you’re a homeowner with a mortgage to pay, you’ll likely fall into one of three categories.

The biggest category of customer is the bank’s favourite: the people who took out a mortgage years ago, and never leave the bank. Perhaps you went on a fixed rate initially, which has now expired, and these days you’re paying the variable rate of interest. For the cost of the postage stamp to send your statement every year, your lender rakes in cash from a deal they did years ago.

If that sounds familiar, you should almost certainly fix your mortgage rate. With variable interest rates around 0.75% higher than fixed rates on the market, you could save a lot of money, even with your existing lender. On a €250,000 mortgage with 20 years to go, for example, coming off AIB’s variable rate and fixing at 3.1% (AIB’s lowest rate) would cut your overall interest costs by €26,000 over the lifetime of the loan.

These kinds of rates are also available elsewhere, and you can lock in for long periods. Forget about shopping around for a new broadband or gas supplier: there is often far more to be saved by moving your mortgage. Yes, you’ll need a valuation, a lawyer and maybe a BER cert: but there is real money to be won and lost.

Our sister company Omac Mortgages is finding effective rates of around 3.15% from PTSB for a 7-year fix, once you factor in the value of their 2% Explore current account cashback offer.

The second group of mortgage holders are literally in a fix. In finance, being too early can be as bad as being too late. If you fixed your mortgage, say, a couple of years ago, your options may be more limited. With luck, you locked in a decent rate at the time – but depending on the period for which you fixed, it may be expensive to change it now as there will be a fee to exit early.

The last category requires some judgment. It’s where you’re nearing the end of a fixed term. You’ll likely have a cost to leave early. But it could be worth the breakage fee to secure a new fixed rate before they rise. If this sounds like you, you should almost certainly take financial advice, as legal costs, early redemption charges and so forth affect the decision. Like a central banker, you don’t want any surprises.

Times are a changin’

The implications of the end of the cheap money era go well beyond mortgages. Having sorted your debt, consider your cash. So many of us have money languishing in an Irish bank at pitiful rates like 0.25% (AIB demand deposit), 0.1% (Bank of Ireland demand deposits), or PTSB’s “why bother” 0.01% demand deposit, where €10,000 invested for a year would earn one Euro in interest (before tax).

That doesn’t work at a time of rising inflation. Whether it’s using other banks or the money market for returns in line with the 2.5% ECB interest rate, or investing the money for growth, better options are available. You might need a demand account for emergency funds – the rest needs to be put to work in productive assets, or at least paid a respectable level of interest.

If it’s certainty you’re after, Irish government bonds are starting to look interesting. Rising yields are a problem for the borrower – and a better return for you as a lender.

The Irish Government Zero Coupon 2031 Bond is now yielding more than 3.1%. Assuming the Irish State doesn’t default, and you hold to maturity, this is a guaranteed and tax-free return to Irish residents.

People drawing down pensions will also find annuities, which offer a guaranteed income for life, look a little more interesting. Having been in the doldrums for years, the rates on offer are starting to look better – a trend we expect to continue.

At the other end of the risk spectrum, rising inflation and interest rates have implications for the stock market. When cash is losing its purchasing value, investors want it sooner rather than later. Businesses producing cash today (like banks, oil companies and pharma) are more attractive than others promising great returns in the future (think AI).

Investors can try to get ahead of this by favouring sectors and regions which will do well in the new environment.

Ralph Benson is head of financial advice at online investments and pensions advisor Moneycube.ie Moneycube organises the annual Pensions Awareness Week (PAW) which takes place this year from September 21st – 25th.