Record number of home-buyers choosing fixed-rate mortgages

A record number of Irish home-buyers are opting for fixed-rate mortgages, according to new figures from the Central Bank. In the three months to February, 56 per cent of all new mortgage loans taken out in the State were on a fixed interest rate. That is the highest figure since the Central Bank first began keeping data on mortgage interest rate choices 15 years ago.

The number of new buyers opting for fixed rates has jumped sharply in recent years. Back in 2014, fixed-rate products accounted for just 10 per cent of Irish home loans.

Borrowers are opting for the fixed rates even though it will cost them more than variable interest rates in the current market.

“While recent months have seen the share of fixed-rate mortgages stabilise, they continue to maintain their highest market share since the series began in 2003,” the Central Bank said.

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Irish banks are continuing to offer customers some of the most expensive mortgage rates in the world, charging 75 per cent more than the euro zone average.

The average rate attached to new variable rate mortgages, excluding renegotiations, meanwhile, was calculated in February at 3.28 per cent.

And the Central Bank figures show the rate on all new home loans – fixed and variable – stood at 3.15 per cent. The equivalent average across the euro zone was significantly lower at 1.8 per cent.

Mortgage interest rates in the Republic used to reflect more closely the main European Central Bank (ECB) lending rates. However, since the crash in 2008, Irish banks have failed to pass on the benefit of falling interest rates to customers as they struggle to restore order to balance sheets undermined by loss-making tracker mortgages and arrears.

New agreements

The premium attached to variable rate products, combined with the likelihood of future rate hikes across Europe, may have increased the appetite for fixed-rate contracts here. Such contracts have traditionally been the norm in Europe, where they accounted for 80 per cent of new agreements over the same three-month period.

At the launch of the Economic and Social Research Institute's Spring Commentary last month, Prof Kieran McQuinn noted that while the "wedge" between variable rates here and elsewhere may finally be narrowing due to increased competition between banks, the shift may be overtaken by a period of higher interest rates generally across Europe.

The imminent ending of the European Central Bank’s quantitative easing programme is seen as likely to usher in a new period of rising interest rates – although there is no market expectation of rate rises in Europe this year.

Merrion stockbrokers economist Alan McQuaid says that, even when the ECB does start ratcheting up interest rates, the cycle is unlikely to be anywhere near as aggressive as in previous cycles.

“But even a two percentage point increase over a number of years could cause serious pain for a lot of homeowners, particularly those new to the game,” he said. “One of the attractions of fixed-rates at the moment is that long-term interest rates are the lowest they’ve ever been, and if you can lock in at affordable rates it makes sense to avail of the current easy backdrop.”

New mortgage loans

The latest Central Bank figures also show the number of new mortgage agreements jumped by a third in the 12 months to February 2018.

The volume of new mortgage loans – which excludes renegotiations of existing borrowings – amounted to €540 million in February 2018, bringing the volume of new mortgage borrowings to €6.8 billion over the past 12 months.

Mortgages with renegotiated terms amounted to €496 million in February. These loans had a weighted average interest rate of 3.03 per cent in that month.