Lenders introduce new fixed-rate mortgage deals

Anticipating a further drop in mortgage rates, two lenders - the ICS Building Society and ACC Bank - have introduced new capped or flexible fixed-rate deals. Mortgage advisers expect others to join them in the coming weeks.

The ICS and ACC rates are particularly attractive, not just because the interest repayments are set at below 7 per cent APR, but because these are capped rates, which mean that if interest rates drop below that figure, so does the customer's repayment.

The ICS is offering a two-year rate - the Flexi-Fit mortgage - which offers an option to switch to a variable one with no penalty if it goes below the fixed rate of 5.75 per cent, APR 7.3 per cent.

The ICS also has another fixed-rate mortgage available which allows the customer to make lump-sum payments up to 10 per cent a year without penalty. Customers can also take three-month payment breaks up to four times during the life of the mortgage. The ICS will also permit a 10- or 11-month mortgage repayment schedule. This allows you to reduce the 12 payments into 10 or 11 months in order to improve cash flow at expensive times of the year like Christmas or the summer holidays.

The ACC's capped mortgage is for one year only. The APR is 6.9 per cent on an advertised rate of 6.75 per cent. This new rate is 0.7 per cent lower than the bank's current variable discount rate, currently 7.45 per cent, APR 7.7 per cent. Like the ICS, ACC Bank will give the benefit of any lower rate to capped rate customers if the discount rate should fall below 6.75 per cent.

Most short-term fixed rates are slightly below the current variable rate and Family Money asked Mr Richard Eberle of the fee-based mortgage advisers, REA Mortgage Services, if he thought fixed rates were a good option.

"Fixed rates are pretty good value at the moment but I don't think they are going to come down much more. Variable rates are probably going to drop to 5-6 per cent which will result in fixed rates being slightly higher, but anyone who can secure in the region of 7 per cent for a few years is not doing too badly."

Mr Eberle added: "The only problem I see with fixed rates is the redemption costs if you want to break the contract. Don't arrange a fixed-rate mortgage until your lender tells you exactly how much it will cost to get out of it, at any stage of the deal. But if you can live with the fact that rates might go down as well as up over the fixed period and are prepared to pay a penalty if you sell the house before the contract is up, then a fixed-rate mortgage at these rates can provide a certain amount of peace of mind."

Though lenders are now obliged under the Consumer Credit Act to point out the penalties associated with fixed-rate loans, it is REA's experience, Mr Eberle says, that they are not emphasising them enough.

"The formula used can be a bit complicated," he says. "Buyers don't pay close enough attention and the lenders don't go out of their way to explain it, because it makes the fixed rate look less attractive. Despite the fact that fixed rates are lower than variable rates at the moment, lenders are making good margins from them since they are borrowing the money in the interbank market for a lot less than they are lending it out."

The reason banks and building societies charge the penalty in the first place is because they have committed themselves to paying for the funds on the interbank market at a certain rate. If rates are dropping - the time when most people want to get out of the fixed contract - the bank will have trouble lending on the redeemed funds at the same rate the first borrower paid and could end up with a loss. But, says Mr Eberle, if the borrower wants to break the fixed contract when rates are going up - they may be buying a new house, for example - there is no reason why they should charge any penalty at all.

Many lenders have told Family Money in the past that fixed-rate penalties are usually waived in such a circumstance.

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Family Money welcomes suggestions from readers on topics of personal finance they would like to see highlighted. Please write to Jill Kerby, c/o The Irish Times, 11-15 D'Olier Street, Dublin 2 or by Fax 6798874 or email: jmkerby@indigo.ie