To Fix or not to Fix that is question

Bronte said:

This is good advice but it is also true that we are at a historical low, the lowest point I have ever experienced and it really can't go any lower so I'd fix. This is based on someone who remembers rates at 15%+ etc. People should bear in mind that a rate jumping from say 3 to 6 percent is a doubling whereas say a 10 to 13 is not even though it's an actual 3% increase in both cases, this is particularly important for people who have only recently begun their mortgage and most of the payments are interest.

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It's also worth remembering that when rates were at 15%+, Ireland was setting its own interest rates in isolation. This was before we joined the ECB.

Yes rates are at a historical low and have little or no scope to go lower. Yes, I'd agree that rates are likely to go back up. What none of us know is when they will go back up and how far - that's the speculative bit.

The timing issue is crucially important. If someone fixes now for three years and pays a margin of 1% or more over the variable rate for the fix, they're paying 1% extra immediately. If variable rates don't start going up until mid-2010, as some economists believe, they've paid a 1% premium for security for a year. If rates creep up in quarter percent increments that the ECB tends to favour, they may never recoup what they've lost.

At the end of the three year fixed period, they're back on whatever rate is available then anyway.

Bronte said:

LD - On the point of people saving the difference between what they are paying on the variable versus the fixed, most people do not have the discipline to do this. With deposit interest so low and especially for people in negative equity it would be better to be putting all spare case to pay down the mortgage.

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I'd agree with the discipline issue. Many Irish wouldn't be too great on that score.

But I'm not so sure that paying money off the mortgage is always the best route, especially if one is in negative equity. While mathematically it's good advice, you're locking up the overpayments, never to be gained again, with the possible exception of KBC Homeloans with their re-draw facility. In these uncertain times, many people would prefer to know they have emergency access to the monies they have overpaid.

Regards, Liam

Kate10 said:

My husband and I sat down to go through the household budget last night and discuss fixing. We've decided to fix for 4 years at 3.57% (currently on AIB standard variable of 2.25%).

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I think you are absolutely spot on in what you are doing. It is a good rate and if it gives you peace of mind and a comfort for the next 4 years, it is worth it. In truth, few of us make any use of the saving as rates fall but immediately feel the pain when rates rise. Good luck. Slim

Kate10 said:

I think it really depends on your personal financial circumstances.

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Wise words, it looks like it makes sense for you to fix Kate due to your own circumstances.

I will not be fixing even though some of the rates are quite attractive. Instead we fixed the rate ourselves but kept our .75% tracker by fixing our repayment at 5% thus we have been overpaying the mortgage since rates started to fall.

If people are worried about rates rising, why not just overpay at the 5 year fixed rate of 3.86% but keep your tracker. You will gain by paying off some of the capital while the rates are low and when rates increase you will not suffer a financial shock unless of course rates rise for an extended period. As we live in a boom and bust world, personally I think there are too many variables for this to happen.

I take Liam's point on overpaying on negative equity but we bought a house for life (albeit at the top of the market) and want the mortgage paid off as soon as possible plus if you have made overpayments and things get sticky, the lender will take this into account.

Other people will say when rates are low you should put the overpayments into a high rate savings account so you have accessibility and if you wish you can pay back lump sums. Me, I would not have the discipline for this. A blow out holiday would be just too easy!

Kate10 said:

My husband and I sat down to go through the household budget last night and discuss fixing. We've decided to fix for 4 years at 3.57% (currently on AIB standard variable of 2.25%).

We thought about all the arguments set out on this thread, and considered saving the difference instead, but ultimately decided that 3.57% is a rock bottom rate. We would have taken your hand off for it at the beginning of last year. I think rates will start to come up by the beginning of 2010. We have a very big mortgage, and my husband has had a 10% salary cut. If rates go above 4.2% we are in trouble. We decided to take the pain now for some security down the line. Our broker agrees and doesn't make a cent from our decision by the way, as we are staying with the same bank!

I think it really depends on your personal financial circumstances.

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Hi Kate.

Doing a bit of snooping on the fact that you're fixing for 4 years @ 3.57%, I reckon you're currently with AIB. Is switching an option for you?
The reason I ask is, Bank Of Ireland are offering a 5 year fixed rate of 3.3%.
Details can be found here :[broken link removed]

So with them, you're getting an extra year's peace of mind, and you're also saving €22.50 per month on every €100,000 borrowed when compared to the 3.57% rate.

Hope this helps, and congratulations on your decision.

Soarer said:

So with them, you're getting an extra year's peace of mind, and you're also saving €22.50 per month on every €100,000 borrowed when compared to the 3.57% rate.

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..or maybe an extra year paying a fixed rate just as rates begin to fall again. Who knows?

NorfBank said:

..or maybe an extra year paying a fixed rate just as rates begin to fall again. Who knows?

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Maybe they shouldn't fix at all so?

And round and round it goes!

Without crunching the numbers at all, I would never go with a fixed rate as it's been set by the bank who just wants to get more interest out of you - I don't see how the mortgage holder can win. If it's security and peace of mind you're after - agreeing to pay a fixed rate is a very expensive way of doing it when you could just be disciplined and save the money. I don't really understand how people find it psychologically easier to fork out extra interest to the bank than setting up a regular savings.

LDFerguson said:

If someone fixes now for three years and pays a margin of 1% or more over the variable rate for the fix, they're paying 1% extra immediately. If variable rates don't start going up until mid-2010, as some economists believe, they've paid a 1% premium for security for a year. If rates creep up in quarter percent increments that the ECB tends to favour, they may never recoup what they've lost.

m

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I know you pay a premium, if you're lucky you won't but what price the security of the fixed. Also what if rates go really high, you'd be more than overpaying then. People shouldn't forget that.

Other points

Kate 10's reason for fixed is a very good example of when to fix, in her particular case she can't afford to pay over 4% so fixing for her is the right thing now.

I think people who are not disciplined with money and who are in or close to negative equity should pay off as much as possible because they more equity they have the more room for manoevre they have. The banks are 'being nice' currently but if they have a capitive market of people in negative equity unable to move institutions that creates a monopoly situation for the banks. Never trust the banks especially when they are in control.

I agree with annR's response, if you are spending energy worrying about the fix / no fix decision why can't you be disciplined enough to stay variable and put the balance to a fixed rate to one side?

Bronte said:

Also what if rates go really high, you'd be more than overpaying then.

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Rates could go really high but going on past performance it seems unlikely.
See here for the ECB rates since 1999. The highest they have been is 4.75%. Of course past performance is no guarantee of future results.

Soarer said:

Hi Kate.

Bank Of Ireland are offering a 5 year fixed rate of 3.3%.
Details can be found here :[broken link removed]

.

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That BOI fixed rate is actually 3.99% (The APR they use is 3.3) . It's better to compare actual rates not APR when comparing fixed rates.


Money Guide Ireland

irishlinks said:

That BOI fixed rate is actually 3.99% (The APR they use is 3.3) . It's better to compare actual rates not APR when comparing fixed rates.


Money Guide Ireland

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Sorry if I mislead anyone!

So even though they state 3.3%, they are actually charging 3.99%? How can they do that? Do the figures in the link I posted mean nothing?

Soarer said:

So even though they state 3.3%, they are actually charging 3.99%? How can they do that? Do the figures in the link I posted mean nothing?

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Banks have to state the APR on loans as it supposedly makes it easier for consumers to compare rate.
It doesn't, it makes it easier for banks to confuse consumers for their own benefit.

Most banks give the nominal rate and the APR but BOI only publish the APR which to me is quite sneaky.

What happens once the Fixed term has passed?

We are looking at taking a mortgage with AIB (pending approval) and are thinking of starting with a Fixed mortgage for 2 years.
When the 2 years has passed, do they generally offer competitive rates (and choice of Variable or further Fixed) to move onto, or will we be forced to accept whatever rates AIB throws at us for the remainder of our mortgage?

You usually get a choice of fixed or variable as available.

AIB have increased their 3, 5 and 10 year fixed rates: article. Surely that means time to fix or is that just what they want us to think?

And seeing as the tracker mortgage (and indeed the standard variable if you are with AIB) is no more, does it make sense to stay with a tracker mortgage no matter what?

Kate10 said:

My husband and I sat down to go through the household budget last night and discuss fixing. We've decided to fix for 4 years at 3.57% (currently on AIB standard variable of 2.25%).

We thought about all the arguments set out on this thread, and considered saving the difference instead, but ultimately decided that 3.57% is a rock bottom rate. We would have taken your hand off for it at the beginning of last year. I think rates will start to come up by the beginning of 2010. We have a very big mortgage, and my husband has had a 10% salary cut. If rates go above 4.2% we are in trouble. We decided to take the pain now for some security down the line. Our broker agrees and doesn't make a cent from our decision by the way, as we are staying with the same bank!

I think it really depends on your personal financial circumstances.

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Kate10, can I just ask if you are currently on a tracker or a standard variable rate mortgage because that rate of 2.25% is way below what I am currently being offered by AIB. I have sold my house and am paying off the mortgage I have with FA with the proceeds. We have bought a new house and are taking out a mortgage with AIB. They are offering a variable of 2.65% which is a fir bit higher that your standard variable

NorfBank said:

Rates could go really high but going on past performance it seems unlikely.
See here for the ECB rates since 1999. The highest they have been is 4.75%. Of course past performance is no guarantee of future results.

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It seems unlikely based on past performancy but as we have a global financial meltdown all bets are off.

A high of 4.75 could be a rate to customers of minimum say 5.75 depending on the banks margin and this is easily a doubling of many people's current rates. One of these days when the storm has died down the banks in Ireland/UK are going to start increasing their margins to claw back their current losses. But I'm no economist.

boe said:

Kate10, can I just ask if you are currently on a tracker or a standard variable rate mortgage because that rate of 2.25% is way below what I am currently being offered by AIB. I have sold my house and am paying off the mortgage I have with FA with the proceeds. We have bought a new house and are taking out a mortgage with AIB. They are offering a variable of 2.65% which is a fir bit higher that your standard variable

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AIB rates for new customers are dependent on the LTV (Loan versus House Value). Under 50% gets you 2.25%. Over 80% gets you 2.65%


Money Guide Ireland

I have a standard variable rate of 2.25% with AIB but am in lovely negative equity land (I got a mortgage before they introduced the different rates for different LTV'S). I am not going to lose this for a fixed rate as I guess my LTV will still be a shocker in 2-3 years so I will be giving up a good rate for nothing. My sister is fixing on the other hand as her variable rate is very poor and she wants security in the knowledge that her mortgage outgoings will be x each month.