"Don't rush to fix your mortgage rate just yet"

Brendan Burgess

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Here is an article I had in yesterday's Sunday Business Post


Don't rush in and fix your mortgage rate just yet

2 November 2014 by Brendan Burgess

In normal times, it’s difficult to decide whether to fix one’s mortgage rate or to take one’s chances with a variable rate. The big advantage of fixed rates is certainty. It’s a form of insurance. The borrower will know what their repayments will be for the fixed rate period and can budget accordingly.

The main advantage of variable rates is that they are much more flexible. If the borrower’s circumstances change they can increase their mortgage repayments without penalty. They are free to trade up or down whenever they want, whereas someone on a fixed rate will have to pay an early repayment penalty if they sell their home.

The banks charge a premium for fixed rates. Taking all these circumstances together, I usually advise against fixing in normal times.

But these are not normal times in Ireland. The average variable rate mortgage in Ireland is around 4.4 per cent. This compares with an average variable rate in the eurozone of 2.6 per cent. So an Irish borrower with a variable rate mortgage of €300,000 is paying around €450 a month more in interest than the average borrower in other eurozone countries.

During the banking crisis, Irish banks had to pay very high interest rates to attract deposits. In addition, they had to pay a substantial premium to the government for the deposit guarantee scheme. These high costs were passed onto borrowers in terms of high mortgage rates.

The lenders no longer have these high costs. The banks have been adequately capitalised by the taxpayer.

As a result, confidence has returned so the bank guarantee is no longer needed. The banks have cut the rates they are paying for deposits right down, in many cases, to less than 1 per cent. But they have not cut the mortgage rates accordingly. They are still charging 4.4 per cent, on average, for mortgages.

The Central Bank has been claiming that the average rate for new a mortgage in Ireland is 3.15 per cent, thus taking the pressure off the banks to bring the rates down. The Central Bank has now admitted that this reported new business rate includes tracker mortgages, although no new tracker mortgage has been issued in Ireland since 2008.

I still cannot understand why the Central Bank does not publish the true rate for new business in an effort to promote competition.

The only possible justification for charging higher rates in Ireland is that we do not have any effective sanctions for people who can’t or won’t pay their mortgages. In France or Germany, if someone doesn’t pay their mortgage, their home is repossessed and sold within a few months. In Ireland, there is uproar if the banks attempt to repossess a home even if the borrower has paid nothing for three or four years.

This lack of sanctions may justify higher mortgage rates for higher loan to value mortgages, for example, 90 per cent loan-to-value (LTV). These are riskier loans and the lenders are right to charge more. But there is no justification for charging 4.4 per cent for a mortgage with a 70 per cent LTV. These should be reduced to the average eurozone rate of 2.6 per cent.

The governor of the Central Bank has recently pointed out that the lenders have not cut rates in line with the cuts in the ECB rates and has questioned whether the banks are overpricing their mortgages.

The chief executives of the banks will be coming before the Oireachtas Finance Committee this week and I would expect them to be questioned about the very high mortgage rates and the level of profitability of the standard variable rate book.

With the stress tests out of the way, I expect that the banks will start competing with each other for market share. AIB fired the first shot last Thursday, reducing their standard variable rate to 4.15 per cent. Welcome as this cut is, they are still charging 1.5 per cent above the rate charged in other eurozone countries.

I expect that, sooner or later, the five lenders still active in the market will reduce their mortgage rates. They will target low risk, low LTV mortgages in particular. Those with high loan to values will not see cuts to the same extent.

So I would advise someone with an LTV below 70 per cent not to fix unless and until the rate falls below 3 per cent. A borrower with an LTV in excess of 80 per cent will probably not see mortgage rates falling below 3.5 per cent, so they should wait until the fixed rate falls to 3.5 per cent.

The decision to fix must be kept under continuous review. In particular, if there is any indication that the artificially low ECB rate of 0.05 per cent might increase, it may be time to fix.

Brendan Burgess is the founder of the consumer website askaboutmoney.com
 
Hi Brendan,

If your on a SVR linked which is not based on LTV but are in negative equity what would your advice be?

Thanks
 
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