ECB rate connected to variable?

[sman]

Just reading this morning that the ECB rate is likely to go up in the next year or so and that this would hit tracker and variable rate mortgage holders.

I just have a question on this.

If the banks have raised variables already because of the high cost of funding, does this not mean that the variable rate is not really linked to the ECB rate anymore.

Why would the ECB rate increase automatically lead to an increase in variable rates? Surely their cost of funding is related to other factors at the moment - otherwise their variable rate would not have increased.

 

[Sunny]

The variable rate isn't linked to the ECB like a tracker as the bank has the flexibility to do what it wants but if the ECB raise rates, the banks cost of funding goes up and therefore trackers and variables will rise. The only reason banks haven't increased tracker rates so far is because they can't

 

[robd]

They are not directly connected but it's extremely likely that an ECB increase will also lead to an increase in varibale rate.

Yes cost of funding is related to other factors. Mainly the cost that Irish Banks and Government are paying to borrow, the later being currently at 5.8%

However all Irish banks are loss making, due to high cost of funding and bad debts due to poor lending practices. The losses need to be turned around so they will up rates at every opportunity.

 

[sman]

ok. so they will probably increase variable rates because its an easy time to do it. but they wont really have a valid reason as their cost of funding will not be changing in line with the ECB rate increase

 

[Sunny]

ok. so they will probably increase variable rates because its an easy time to do it. but they wont really have a valid reason as their cost of funding will not be changing in line with the ECB rate increase

They will because when the ECB raise rates, Euribor (cost of bank borrowing) goes up as well.

 

[Booter]

They will because when the ECB raise rates, Euribor (cost of bank borrowing) goes up as well.

Are our banks securing funding based on Euribor?

This issue has been bubbling away in the back of my mind since the banks starting pushing up the variable rates. The banks continue to justify increasing rates on the basis that it costs them more to borrow money than they make on these products, particularly trackers. But if you examine the sources of bank funding, and the rates attached, does this claim really stand up?:

- >100BN deposits from ECB - is this at 1%?, I'm not sure
- > Maturing bonds being paid off by Irish taxpayer = free
- > no borrowing on open market due to being frozen out
- > existing deposits at low interest rate, again I'm not sure

Unless I'm missing something, banks are actually profiting on even the best tracker products out there. If not, can someone point out the higher cost source of funding that I've missed?

 

[lonelyplanet]

I have seen recommendations by Eddie Hobbs for people even on trackers to discuss with their banks about fixing the mortgage for a long term.

Will the ECB rates rise that much in the forthcoming years ??