To Fix or Not to Fix? Now that is a Dilemma!

The Irish economy has, to all intents and purposes, recovered. Unemployment in July 2018 was down to 5.1%. The housing market sees demand far outstripping supply. The banking system appears to be working once again, with banks competing to offer cheaper and cheaper mortgage rates to customers.  

In June 2018, the ECB announced that their inflation outlook for the years 2018 to 2020 was 1.7% per annum, below their 2% target. This means that, in the short-term at least, there is little chance of their base interest rate increasing. Indeed, the ECB suggested that interest rates would remain at their current levels until at least the summer of 2019.  

What are your options?  

There are essentially two interest rate options to consider; variable rates, where the rate you pay can be increased or decreased by the bank, typically based on the cost of funds to them or; fixed rates, where the rate is locked in for a specified number of years. 

Many Irish lenders also offer a hybrid called a split-rate mortgage. Borrowers apply for portion of their mortgage to be at a fixed rate & the balance will be on a variable rate. This option may suit you if you would like to be able to make occasional lump sum repayments but retain an element of the security provided by a fixed rate mortgage. 

 So, should we fix the interest rate on our mortgage? 

The answer depends on your own personal situation and priorities. Some borrowers, particularly first time buyers or those will low levels of disposable income, need the predictability of fixed monthly repayments for, say, the next five years. For others, whose circumstances may change in the short term, or who may seek to move house sooner, a variable rate is more appropriate. Likewise, if you want to be able to make lump sum payments (say, bonus payments), a variable rate may be more suitable for you, as the bank will not impose penalties for early redemption or lump sum payments.  

 As a rule, the tighter your budget, the more suited the fixed rate option is to you. Given your mortgage is most likely your biggest monthly outgoing, this will give you some certainty. With rates possibly increasing next year from their historic lows, a 5-year fixed rate may cover a good portion of the anticipated upward interest-rate cycle.  

 At 90% loan to value, variable interest rates currently range from 3.15% to 4.5%; as 5-year fixed rates, for the same cohort of borrowers, are available from 3%, there is no built-in premium for fixing interest rates just now, which is good news for borrowers seeking fixed rates. 

In summary; 

Mortgage TypeAdvantages Disadvantages
Variable Rate • Flexibility – no penalty for paying off mortgage early
• Benefit from falling interest rates
• Interest rate increases have an immediate impact and could result in significantly higher repayments
Fixed Rate • Certainty – knowing your monthly cost for the entire period your rate is fixed
• Protection from rate increases during the fixed term
• You don’t benefit from interest rate reductions during the term
• You may be penalised if you pay down or clear your mortgage during the fixed period

What happens when we complete our fixed rate term? 

Mortgages are long term products that can last for up to 35 years, so you need to know where you stand once the fixed period has been completed. Lenders have different ways to transition borrowers who have completed their fixed-interest term, so before fixing you should find out what suite of products will be available to you at the end of the fixed term.  

Knowing the rates currently available from your lender may influence your decision-making but your situation may be very different in, say, 5 years’ time. You may not be able to move lender at that stage if your own circumstances have changed, such as additions to the family and a parent giving up their employment. Lenders criteria can change over time also.  

Hopefully at the end of the fixed term, you not only owe less to the bank, but the value of your property has increased also. Did you know that some lenders would not currently allow you to move to a lower loan to value bracket (and therefore a lower interest rate) in the future? Some lenders still discriminate against existing customers in favour of new ones. 

Next step for borrowers 

There’s no substitute for impartial advice from an expert. After all, you are considering a seriously important decision with your most significant financial commitment.  

Our colleagues at Irish Mortgage Corporation are very well placed to provide you with full information on fixing rates and your post-fix options from Irish residential mortgage lenders.  

For further information on fixing or any other aspect of your mortgage please contact us on 1890 428 343 or by email to info@moneycoach.ie