ECB Rate - What's 'Normal' or Likely?

I was looking at the questions in this thread yesterday and it got me thinking.

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A lot of attention is given to the price of a house and how much someone can/can’t afford and there isn’t nearly as much of a discussion of what the interest rate on the mortgage over the lifetime will be - probably as it’s an unknown - but this is such a significant factor. If the average rate is 4.5% that’s a whole lot different than an average rate of 6% over the lifetime of the mortgage.

Anyway it got be wondering what the ‘normal’ ECB rate over say 20 years should be?

We all remember the days of it being 3 and 4% but was that just to the birth phase of the euro? And was that due to the PIIGS going a bit crazy and driving up inflation? (hence the problems they have now)

Is a 2% rate a more realistic long term rate?

You often hear interest rates will be 6% so with our banks margins that will in and around a 2.5% ECB rate. But is it likely to go to 3.5%? meaning 7% rates here.

And what is the time horizon given the current difficulties? Personally I could see an ECB rate at or below 1.5% for the next ten years.

So in summary two main question;

What do you consider a ‘normal’ ECB rate?

What do you think is the highest rate of interest we’ll see from one of the two main Irish banks in the next 10 years? (just an opinion obviously given the long time frame)

Good question - very hard to answer - if I knew for definite I’d be off making my fortune in the financial sector. As far as I can see 4%-5% seems to be the rate in “normal times” - when we ever reach normal times again is anyones guess. if there came a stage when eurozone economic groth was around 2-3% I think the rates would go back to the 4-5% level. God only knows when this will happen (and I’m an atheist) and as far as I can see we are going to be down around 0.5-1.5% rates for the foreseeable future.

Ive a tracker with BoI - ECB + 0.75%.
I got a letter from them a couple of days ago telling me that if I was worried about ECB rates rising they’d let me fix at 2.50% for 3 years or 2.80% for 5 years with a guarantee that I would revert to the same tracker rate at the end of it.
Allowing for them trying to make a few quid off the deal, they obviously don’t see ECB rates going much higher over the next 3-5 years.
Neither do I, so I passed on the offer.

I would think that they’ll eventually head back up to around the 4.00%-4.50% pre-2008 levels

On a 25yr mortgage an increase of 1% in your mortgage rate is going to increase repayments by approx. 10% (this increase reduces as the term of the mortgage reduces)

I read before that a base rate of 4%-4.5% is a non boom/recession rate.

Well at the top of the European booming markets, ECB rate topped at 4.75% to curb inflation.

Can’t really see it ever going beyond 5% even if markets really took off after a decade of austerity.

At +4% the banks may start to offer trackers again, but after being burned so badlt last time, they probably would go below ECB+1.5%.

I just can’t see a 4% rate in the next 15 years, easy to say that now i guess, but I would have thought it would take a spectacular recovery for that to happen.

Anyone care to link what the average for the UK and US has been for the last 50 years?

Isn’t Europe likely to follow these after it’s ‘teething problems’ in the early years with the PIIGS?

All it takes is a bit of stagflation.

Ze Germans are paranoid about hyperinflation and really don’t care whether you can afford to pay your mortgage.

The problem though is that the banks here already have a variable rate of at least 3% over the ECB base rate, so that if you take out a mortgage today you’re looking at a minimum of 3.75% at a time when base rates are as low as they’ve ever been. With the well documented insolvency cloud hanging over them I can only see the banks increasing the spread in the short to medium term.

Also as has been pointed out already a historically normal rate is more like 4-5%. You can argue that we are in for a Japanese lost decade with deflation and rates bumping along the bottom but that’s a gamble so I definitely think you should be using a 7-8% rate in your stress test calculations before signing on the dotted line.

Don’t fix anyway

I agree. You’re already looking a variables c. 4% now.

When ECB goes up, you’ll def be looking at close to 7% for that same variable.

And therein lies the big issue. I know a number of families paying mortgages of between 1500 - 1700pm (both parents working) and they are getting by okay @ 4.3% SRV. 7% will absolutely hammer a lot and i mean a lot of people (basically anyone not on a tracker or sensible pinsters).

This will no doubt lead to widespread arrears unless the government do something. The something possibly being using AIB, and reducing it’s margin to gloss over the massive PPR problem to go with the massive BTL problem.

It’s going to interesting how things pan out for this country if we have 7% rates because i know many of my friends, family etc aren’t prepared for them and would re royally screwed.

Again on this - normal based on 2002 to 2008? Was this not more of a blip than normal? Now it’s obviously quite low but could this be the new ‘normal’? Or say 1.5 - 2%% given reasonably stable eurozone economic performance.

What is the 4-5% actually based on? Just the first few years of the euro?

I see your argument. We don’t have enough data on norms for the Euro through different boom and bust cycles.

4-5% prevailed when pretty much all of Europe was boming.
1% average when it’s in crisis.

So in a normal market, a few year hence, where everyone is making healthy, undramatic gains, the ECB rate would perhaps average slightly lower, say 2-3%.

Long-term Bundesbank rates. The Bundesbank base rate varied from about 3% to about 9%, IIRC (I looked at one stage). The drag effects of the vegetables will help keep rates lower than they might get to, hence even thought the BuBa rate averged about 6%, we can slice a bit off that. Maybe.

Cheers kind of the data i was looking for.

Now just a further query on that - i’ve read about german providers offering 20yr rates at present at 3.8%. Obviously that is an average and may be 1.5 - 2% for 10 years and 6% for years 10 - 20. Any thoughts on that current rate being offered.

Main issue is not the ECB rate which I think is going to remain low for 3-5 years but it’s the Irish banks trying to increase variable rates. That’s part of logic I used to fix for 5 years 2 years ago. However once there is a recovery then market forces should take over and a bank’s ability to charge a margin of 3-4% will fall away as competitors will start to undercut that rate to win market share.

I suppose, i’m interested in the plus 5 year aspect (difficult i know), and i’m wondering if what you say about reducing bank margins will happen so that even if the ECB rate is say 3% could be still see a 5.5% rate in ireland or is it likely to be 6.5% (given current margins of at least 3.55% in Ireland).

I would have agreed with everything you have just said 5 years ago… but given the level of arrears at the moment, and that the banks are doing little to push people to keep up their repayments because of the widespread nature/government influence/knock on effect, I would argue that since so many people would be fubared that it almost wouldn’t matter because there would be little consequences to anyone, if the current status quo is maintained.

So cynically, if there is anything we have learnt from the last decade in Ireland, it is that debt is your friend, especially if its your PPR, so fill your boots :unamused:

Do we really expect a change in sentiment? Normally I would be the most anti debt person around, but in the last year I just can’t see any benefit in my normal stance.

^^ but are they not trying to ignore the issue given 90% of the country can and are still paying their mortgage. With 7%+ rates that might be only 70% (guess) that can and will make repayments in full. Different ball game then no?

I’d argue that 10% arrears or 30% arrears is not going to change the overall approach to the issue in Ireland. But only my opinion. I think we will soon see more than the current 1 in 800 repossessions per arrears, as mentioned in another thread, but not that much more.

Honestly I hope I’m wrong, but given how long the banks/VIs have kept the status quo going, I’d be skeptical