High price for security

In the aftermath of the currency crisis in the winter of 1992-93, shell-shocked borrowers who had just seen interest rates soar into the stratosphere became increasingly concerned with obtaining some degree of security.

As a result, many opted for fixed-rate mortgages which ensured their monthly repayments would not change. But instead of safely weathering further shocks to the financial system, they ended up paying well above the prevailing variable rate as Irish interest rates began a slow but steady decline to the levels obtaining in the rest of the euro zone.

Although lenders are unwilling to provide a breakdown of the number of borrowers currently locked into fixed-rate mortgages at high rates of interest, they say their numbers have declined significantly in recent years as even five-year mortgages - the longest period most Irish borrowers would have been prepared to consider - taken out in 1993 have washed through the system by now.

"We have had a relatively low interest rate environment for some time so the trend in recent years has been to move away from five-year fixed products to two and three-year fixed rates or one-year fixed rates for the first-time buyer," one mortgage lender says.

Many of these terms have been maturing of late and mortgage-holders, conscious that rates had further to fall, have been sticking with the variable rate while they wait to see where lending rates finally settle.

But although institutions say they do not have large numbers locked into high rates on their books, there are still an unfortunate few paying what now seem punitive rates of interest of 8 per cent and more in an environment where variable rate are currently around 6 per cent and set to fall further.

Such borrowers should contact their lenders and do the sums to see if it makes sense for them to break the fixed-rate contract before the term expires. However, the general consensus seems to be that unless there is quite a bit of time to run on the mortgage contract or the fixed rate is very high, the penalties charged by financial institutions for breaking the contract will outweigh the savings made.

The penalties vary from institution to institution but all impose some form of penalty although there are differences in severity.

The lending industry claims that penalties have to be charged because they enter fixed-rate funding commitments on the other side of those loans. However, this does not fully explain why some institutions impose harsher conditions than others.

The methods used to calculate penalties also vary in complexity. Some institutions simply charge six month's interest on the outstanding balance of the mortgage while others have much more complicated formulas.

Irish Permanent charges the lower of half the interest the mortgage holder would have paid over the remaining term of the fixed period or the difference between the interest the bank could earn by investing the outstanding balance in Government bonds for the outstanding term and the interest foregone on the fixed mortgage.