If interest rates rise by 1% | how much will your mortgage payments increase?

  • By: Walter Dunphy ACCA
  • Date: July 11, 2022
  • Time to read: 3 min.

Worried about mortgage interest rising and hitting your pocket, but not sure what the actual impact will be? In this blog post, we will discuss the impact a 1% rise in interest rates will have on your finances.

Why are interest rates rising?

Money was printed in 2020/2021 like it was going out of fashion and now the world is paying the price at extremely high inflation rates. Irish inflation rates hit 8.2% in May and this may still not be the peak.

To try and reduce these runaway rates of inflation, central banks all over the world are now starting to raise interest rates. Rates have been at historically low rates over the past decade, but now we may have to get used to paying much higher interest rates on our mortgages.

The ECB has announced it will be raising its base rate by 0.25% in July and there could be further hikes on the way in September and later in the year if inflation remains at its current levels.

To understand how this may affect your pocket let us have a look at an example of how much a 1% rise in interest rates would affect monthly mortgage repayments for varying levels of loan size.

Now the ECB has the added pressure of balancing a fight against inflation without causing huge spikes in the interest rates countries such as Italy and Greece have to pay which could lead to potential defaults. As a result of these pressures the ECB are facing we may not see them rise as high as rates in the United States.

Increase in Monthly Mortgage repayment due to a 1% interest rate rise

Of course, these rate hikes will not affect everyone in the short term, those who are already on a fixed mortgage will not have to bear this burden immediately. The people affected will be new homeowners and those already on variable-rate mortgages.

The below data uses the assumption that the term of the mortgage is 30 years.

Mortgage AmountIncrease in Monthly Mortgage repayment due to 1% interest rate rise (Approximate)

As you can see from the above data even though you might think a 1% increase in interest rates seems minuscule, but it really does have a big effect on your monthly repayment.

If we take the average mortgage in Ireland which is €262,000, a 1% rise in mortgage rates would result in an increase of approximately €145 per month. For a family who hasn’t budgeted for this, it would be quite a shock.

You might also be shocked to see that the total interest payable is €147,452 on a €262,000 30-year mortgage, with an interest rate of 3.23%.

Free Mortgage Repayment Calculator

Before you commit to a mortgage it is good to get your head around how they work. Why not download our free calculator that can help you understand what each of your potential scenarios looks like.

You can see how the monthly repayment increases and decreases when you change the loan size, the term, and the interest rate.

It is also good to be aware of how the interest on a mortgage is front-loaded. When you initially start repaying your mortgage roughly 50% of your repayment will be interest and the other 50% paying down the principal.

As you get closer and closer to the end of the term of the loan, then a much larger portion of your repayment will be going towards actually paying down the principal.

Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.

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