Key Post Fixed or variable rate?

The purpose of this Key Post is to help people to make the decision for themselves based on their own circumstances.

First, if you have a tracker mortgage, don't fix your mortgage rate

Assuming your tracker is a cheap rate, you will have that cheap rate for the full term of your mortgage. Many people have lost their cheap tracker by fixing the rate for a 3 year period. If you have a cheap tracker, keep it.

Variable rates are much more flexible

• You can increase your repayments without penalty
• You can pay off a lump of capital without penalty
• You can switch your mortgage to another lender without penalty
• If you want to trade up, you can sell your home and pay off your existing mortgage without penalty

You might well argue that you won't be doing any of the above over the next 5 years, but circumstances change and as a general financial planning principle, it's best not to be tied into products which you can't change without penalty.

Fixed rates are generally more expensive

• Banks don't like fixing either, so they charge more for fixed rates
• Sometimes, they price their fixed rates very high to discourage people from fixing.

Fixed rates do give you peace of mind

• If you are worried that you could not afford a rate rise, then fixing will give you some peace of mind.

There are often hidden downsides to fixed rates

• Some borrowers opted for fixed rates when they could have opted for cheap trackers - this has been a hugely expensive mistake, which was not obvious at the time.
• Some borrowers lost cheap trackers when they fixed their mortgages
• Most Ulster Bank customers get a discount on the very high standard variable rate if they have a current account with Ulster Bank. They lose this discount if they fix and end up paying the very high Standard Variable Rate.

ECB rates are impossible to predict

• When the ECB rate was 2%, many people recommending fixing as they felt that the rate could never go lower. As of October 2012, the ECB rate has fallen to 0.75%.
• As of now, it is hard to see ECB rates falling much further. However, it is also hard to see them rising over the medium term. But, in truth, no one really knows.

Update June 2014. This just shows how hard it is to forecast rates. I said in October 2012, that it was hard to see ECB rates falling much further than 0.75%, but now they have fallen to 0.15% and could be cut further! When the rate rises come, we will probably be surprised as well.



The behaviour of individual banks is difficult to predict

• The PTSB SVR has fallen over the last year by around 0.85% more than the ECB rates
• The AIB SVR has risen by around 1% while ECB rates have fallen.
• An AIB customer would be very happy to have fixed, while a PTSB customer would be regretting the decision.

Consider fixing part of your mortgage

Some lenders allow borrowers to fix part of their mortgage and leave the rest on variable.

This hedges your bets.

It also allows you to overpay your mortgage without penalty.

Let's look at a case study

RMCF asked

I'm on an AIB loan which will charge 4.04% from November.

So you think it might be worth considering moving to a fixed rate?
These are currently:

2yr : 4.65%
3yr : 4.88%
4yr : 5.15%
5yr : 5.35%

I suppose it depends on how much we think the rate may rise over the next couple of years?

Click to expand...

Let's look at the 5 year fixed. On a mortgage of €100,000, you will pay €1,350 more each year. If AIB does not change its SVR, this will cost you around 6.5% more over the 5 years.

I think it's reasonable to assume that ECB rates will rise over the next 5 years. Let's say that they rise by 1% after 12 months, and by 2% after 3 years.

In this scenario, staying on SVR will be better for you.

it's a personal decision. But for what it's worth, this is what I'd do: -

Go with the variable rate but hedge your bets. If you could theoretically afford the repayments on the 5-year fixed rate, then set up a regular savings account paying the difference into it each month. If your variable rate repayment goes down, increase the savings. If your variable rate goes up, decrease the savings. If the variable rate repayment goes over 5.35% during the next 5 years, dip into your savings account to subsidise it. My gut feeling - and this is only speculation - is that you'll end up with money in the savings account at the end of five years.

Liam D. Ferguson

FAQ

Do banks charge a fee for fixing?

No.

How are the charges for breaking out of a fixed rate early calculated?

Your contract may specify the calculation.

I am in a fixed rate, should I pay the penalty for breaking out?

Before breaking out of a fixed rate, check if you are entitled to a tracker when the fixed term ends.
When the ECB rate fell, many people switched out of their fixed rates.
If they had stayed in the fixed rate for the full fixed term, they would have been entitled to a tracker when the fixed term expired.
By breaking out of the fixed rate, they lost their entitlement to the tracker.

Don't rely on anything your lender tells you on the phone. They often get it wrong.
Get your original letter of offer and check to see if you are entitled to a tracker.
Check the documentation you got when you fixed the rate.
If you get a quote for breaking out of the fixed rate, read the documenation very carefully. What does it say about your tracker rate?
Ask a solicitor to check your entitlements.

Assuming you are not entitled to a tracker...

1. Calculate what your repayments will be until the end of the fixed period if you just keep the fixed rate.
2. Calculate what your repayments would be over the same period on the Standard Variable Rate (SVR).
3. Factor in an increase in your repayments into 2 above. This is the hard part - how do you know how much the SVR is going to increase? You don't, so you have to guess.
4. Find out what your penalty will be for breaking your fixed rate.

Add up 2 + 3 + 4. If the answer is still considerably less than 1, then you should think about doing it. But you're still not guaranteed to save money because your lender might hike up their SVR by more than you guessed.

N.B. - If there's any possibility that you have a contractual right to go back to a tracker rate after your fixed rate ends, then find out if you still have this right if you break the fixed rate. If you don't, then my opinion would be to stay on the fixed rate to save your tracker rate.

(Thanks to Liam Ferguson for this bit)

Some excellent info there Brandan and Liam D, much appreciated.

Think I'll stick with the SVR for now.

LDFerguson said:

it's a personal decision. But for what it's worth, this is what I'd do: -

Go with the variable rate but hedge your bets. If you could theoretically afford the repayments on the 5-year fixed rate, then set up a regular savings account paying the difference into it each month. If your variable rate repayment goes down, increase the savings. If your variable rate goes up, decrease the savings. If the variable rate repayment goes over 5.35% during the next 5 years, dip into your savings account to subsidise it. My gut feeling - and this is only speculation - is that you'll end up with money in the savings account at the end of five years.

Liam D. Ferguson

Click to expand...

Great post Liam, totally agree, have said this to others in the past.

Now that ECB rates are so low, and very unlikely to fall much further, I wonder if there is a greater argument for fixing?

The ECB rate is 0.15% at present. It seems to me that the 4.5% rate is too high for this ECB rate. It may attract new entrants into the market, so while the ECB rate is unlikely to fall much further, maybe the banks will be forced by competition to bring down their variable rates.

As rates are not expected to rise in the short term, I see little point in fixing for one or two years, but what about a 5 year or 10 year fix?


Long term fixed rates

It's very hard to know. When the world economies return to normal, the ECB rate should probably be around 3% or 4%. If the current margins were maintained, that would imply mortgage rates of 8%/ 8.5%. A rate of 4.7% from Ulster Bank would seem like great value in that scenario.

Charlie Weston reports that AIB is due to bring down its fixed rates by 0.59%

Excellent info here thanks everyone

I have to say Brendan that I do not agree with your approach to this question.

You seem to see the decision to fix or not to fix as a question, which option will leave the borrower better off. This is not the right question to ask when deciding to fix or not.

The borrower cannot tell in advance which choice will cost them less, as you rightly point out future interest rates are, like all future events, unknowable.

Deciding to take a fixed rate because you expect rates to rise and thereby save money is deluded. The banks have priced in any possibility of a rate rise into the fixed rate cost. Sure some people get luck and fix before a rise, but that is no different than saying some people win money betting on the horses. Betting on the horses is not a zero sum game it is worse than that, there is a profit priced in for the bookies.

Same with fixed rate mortgages, there is a margin priced in to protect the banks against the possibility of a rate rise.

The correct way to consider the decision to fix or not is to the examine the benefit a fixed rate gives you i.e. certainty against the cost of that benefit. But don't loose sight of the fact that a fixed rate mortgage always costs you.

Hi cremeegg

I don't fully follow your argument, but I don't think we are in much disagreement on the outcome.

Go for a variable rate mortgage unless you need the security of a fixed rate.

Brendan

Hi cremeegg,

For the most part, I'm with you - I've never been a fan of fixed rates and have generally felt that the only reason to choose one is for the security of knowing what your repayments are going to be for a fixed period of time. You may (and probably will) pay extra for that security, but you pay extra for insurances all the time so think of it as a form of insurance - you're paying a premium for additional peace of mind. Or else hedge your bets, go for the variable and save the difference each month - see my earlier post above.

That said, at the moment there are some anomalies around. For example, Haven's 3-year fixed rate is 4.2% (APR 4.6%). Their variable rate can be up to 4.49% (APR 4.6%) if the LTV is >80%. These are new business rates only.

As the fixed rate is lower than the comparable variable, I think there's a reasonable argument in favour of going for the fixed. Could the variable rate come down in the next three years? Yes. Is it likely to?

You'd also have to take account of the inflexibility of the fixed rate option in terms of overpaying, if that's relevant to you.

What do you think?

The last post above was July 2014. The gap between fixed & variable seems to have changed. A friend is with BOI - LTV less than 60% - variable Aug 2015 is 4.0% APR - 5 Year Fixed is 3.9% APR - so, fixed rates are no longer higher than variable rates - why is this?
If one is not bothered about the inflexibilities of the fixed rate - like Liam, I think there is a very good case for fixing at current fixed rates. When fixed rates are not higher than variable - Liams idea about staying on variable and putting a bit in a monthly savings A/C, does not apply.

cronley said:

The last post above was July 2014. The gap between fixed & variable seems to have changed. A friend is with BOI - LTV less than 60% - variable Aug 2015 is 4.0% APR - 5 Year Fixed is 3.9% APR - so, fixed rates are no longer higher than variable rates - why is this?

Click to expand...

Ah...No.

As LDFerguson said above a fixed rate higher than a variable is an anomaly, the situation you quote with a BOI fixed rate lower than a variable is more normal.

The bank thinks that variable rates are coming down so they want people to fix now. If you fix you will get certainty but it will likely cost you.

BOI must think that Brendan is going to have success with his SVR campaign.