Fixed or variable: what mortgage rate should my daughter go for?

Q&A: Dominic Coyle

Given the current turbulence and the lower rates, I’d go for a fixed rate. Photograph: Thierry Roge

Given the current turbulence and the lower rates, I’d go for a fixed rate. Photograph: Thierry Roge

 

My daughter just got mortgage approval despite the Covid-19 crisis. She is lucky to have a permanent teaching post. Do you suggest fixed or variable payments?

Ms GH, email

Your daughter’s success in securing a mortgage is a rare moment of good news for aspiring homeowners during this Covid crisis. The real test lies ahead, however.

The banks, still scarred by the fallout from their reckless lending in the run-up to the financial crash over a decade ago have been very quick to pull in their horns. Only the most risk-free applicants are finding a way through the system.

If she is applying with a partner, or friend, she will likely succeed only if that co-purchaser is also employed

Many, even those who secured mortgage approval, have found themselves running up against a stone wall when it comes to actually drawing down the mortgage when they find their home, unless their employer is able to confirm the security of their position.

Your daughter’s position as a public sector worker, a teacher, in full-time employment in a permanent position was always well-received by lenders; now it is gold standard. As long as she is applying by herself, the approval should be honoured.

Possible co-purchaser

If she is applying with a partner, or friend, she will likely succeed only if that co-purchaser is also employed and not relying on State support through the temporary wage subsidy scheme, soon to be renamed the employment wage subsidy scheme.

Assuming that’s the case, we come to the eternal question – should you opt for a variable mortgage interest rate or a fixed one.

Traditionally, I have been leery of fixed rates, arguing that banks are more adept at assessing market conditions and would rarely price fixed rates to deliver less profit to themselves than variable rates. But the world has changed.

The lower fixed rates certainly indicate banks are aggressively pointing people to a fixed loan

The financial crash of 2008 showed that, far from being good assessors of market conditions and of risk, the banks had essentially given up any assessment at all in a mad dash for market share. We, and they, are still paying the price.

Fixed rates currently are below variable rates. That would point to future cuts in variable interest rates but, given the banks’ problems with profit margin, and their generally fragile balance sheets, I’d expect that’s not something they’re going to be enthusiastic about.

Bank certainty

The lower fixed rates certainly indicate banks are aggressively pointing people to a fixed loan. Why? In part it gives the banks certainty in income stream and, right now, that’s important to them.

You can get a two-year fixed rate (from KBC for existing customers, or Ulster Bank) from 2.3 per cent right now, or a five-year rate of 2.5 per cent, also from KBC. If you’re not an existing KBC customer, EBS’s Haven offers a market leading 2.55 per cent five-year rate.

Fixed rates over terms from two to five years vary up to 3 per cent across all lenders.

On the variable front, the best value currently is with AIB, Haven and Finance Ireland, at 3.15 per cent, running up to 4.5 per cent at Bank of Ireland.

Fixed rates traditionally provide security to stressed borrowers in the early years of a loan. There’s no guarantee of best value, but given the current turbulence and the lower rates, if I were buying now, I’d go for a fixed rate, ideally over five years.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into.

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