Banks unite in urging customers to lock into low interest rates

Consumers should take advantage of Ireland's historically low borrowing rates now before they start to rise from their "unsustainable" lows, three of the country's largest banks said this week.

Long-term interest rates are set to rise from the record low where they have been languishing for the past 24 months, making now the best time to take out a fixed rate mortgage, said Niall Dunne, market strategist at Ulster Bank. His comments, made earlier this week in the bank's focus report for July, are backed up by the Bank of Ireland and Permanent TSB, which lowered the rates on some of their fixed-rate home loans subdequent to that report. Bank of Ireland also predicts that if rates move anywhere, it will be upwards.

Of course, lenders have been saying this for some time and most have since lowered fixed rates.

"We believe this provides customers with a limited window of opportunity to lock in at historically low rates," said Olive Moran, marketing manager for Bank of Ireland Mortgages. "Our view is that it is unlikely that the ECB will drop interest rates and therefore it is only a matter of time before fixed rates start to creep up again."

According to Mr Dunne, there is an 85 per cent chance that the European Central Bank (ECB)will raise long-term borrowing rates in the next six to nine months. "A series of unprecedented events have combined to drive long-term fixed rates to historic lows in recent months," he said. "However, rates seem certain to rise over the coming months. So, to take advantage of the value on offer, we recommend that our clients now consider hedging."

In the bank's July report, Mr Dunne outlines three possible scenarios for rates in the euro zone, which includes Ireland. Each set of circumstances ends with a rise in interest rates.

He assigns a 1 per cent chance that political events, such as the rejection of the European Union's constitution by France and the Netherlands, will increase the cost of long-term debt and therefore push rates higher.

In the second scenario, he allots a 15 per cent probability to the possibility of a euro-zone rate cut before the end of the year. If such a cut were made, the market would grow more optimistic on the euro zone's future growth prospects, and in the end lead to higher long-term rates, he says.

Mr Dunne's third scenario is the 85 per cent chance of a rate increase within the euro zone by March 2006. Bank of Ireland forecasts rates will increase by more than half a per cent over the next three years. By contrast Rossa White at Davy expects lending rates to remain at 2 per cent until the end of next year.

Thankfully, the ECB policymakers do not listen to everything economists say when making their monthly decisions on interest rate moves. Admittedly though, they have come under increased political pressure recently from individuals, including Germany's economy minister Wolfgang Clement, to cut rates amid concerns the rejection of the EU constitution may lead to a break-up of the EU.

"If the market's perception of the bloc's perceived stability has suffered as a result of these events, then the cost of long-term debt in the euro zone will likely rise," said Mr Dunne.

Moreover, if rumours of a break up of the EU lead to a decline in demand for euro government bonds, debt prices may fall, pushing up bond yields, the key determinants of long-term rates.

At their last meeting on June 21st, ECB policymakers resisted this pressure and kept rates on hold at 2 per cent.

The decision this week by Bank of Ireland to reduce the rates on its one, two, four, five, 10 and 20-year fixed-rate mortgages for new customers and existing clients with variable-rate loans, and by Permanent TSB to lower its fixed-term rates on its one to 10-year mortgages, follow similar moves by EBS, IIB and Allied Irish Bank.

The raft of reductions highlights the fact that often when one bank sees a reason to change its lending rate, it will not take long for the other players in the industry to follow suit. Moreover, with the average consensus seeming to point towards the next rate move as upwards, consumers would do well to take the banks' advice and lock in their borrowing rate now.

"There has rarely been a better time for customers to fix with the current range of fixed rates offering exceptional value," said Niall O'Grady, head of marketing at Permanent TSB.

For example, a Bank of Ireland customer on a variable tracker of 3.1 per cent would do well to lock into a three-year fixed-rate at 3.49 per cent, as interest rates would only have to rise by 0.5 per cent over the next three years for the customer to benefit.

A spokeswoman for AIB, which reduced its fixed lending rates on May 17th, said it was not part of the bank's policy to tell customers which product to purchase at a particular time. "While the bank is not making a point of advising its customers to take out fixed-rate mortgages at this time, it does make them aware of all the different financial options available to them," she said.

AIB has also made no forecast as to where it sees interest rates moving in the future, she said.