Nobody wants to pay more for anything than they need to. Yet, if you are not considering the latest fixed-rate mortgage rates, that's exactly what you might be doing.
Whether you are a first-time buyer, you are on a variable rate or you’ve already fixed, there are deals to be had. With fixed rates now ranging from 2.2 per cent, anyone paying more needs to ask themselves, and their lender: why?
Irish mortgage interest rates remain among the highest in Europe. The weighted average interest rate of all new mortgages agreed in Ireland stood at 2.88 per cent in December, compared to 1.37 per cent in the euro zone.
Despite political pressure, banks here have been slow to budge on rates. They are offering more competitive fixed rates, however. Householders are following the money with fewer choosing variable rates and more opting to fix. Some are switching lender to get a lower rate.
Of those who borrowed for a private dwelling house, fixed-rate mortgages accounted for 81 per cent of mortgage draw-downs in the last quarter of 2019, with a majority of these mortgages fixed for more than three years. Fixed rates for the period averaged 2.79 per cent, down 9 basis points (a basis point is one 100th of a per cent) on the same time the year before. Variable rates were higher at 3.12 per cent.
Rates have continued to fall this year, and so competition in the Irish fixed-rate market, once as exciting as a slow-paced marathon, is at last showing some lick. Banks are eager to buy certainty for themselves by locking customers in. Consumers making the right moves can be the winners.
Take Sean and Mary. They have a mortgage of €320,000 on a house valued at €400,000 with 32 years remaining. Their monthly mortgage repayment is €1,516 on a variable rate of 4.2 per cent with a pillar bank.
By opting for a current offer and fixing for five years at 2.2 per cent, their repayments will drop to €1,162. That’s €354 a month back in their pockets, or €21,240 over the five-year period – not bad.
For an extra gold star, if they can afford it, they could fix but overpay their mortgage by the amount they are saving. This can cut years of their mortgage and save thousands in interest.
To fix or not to fix?
While a fix is always a punt, if you bet right, you could save thousands. There are some things to consider, however. With a variable interest rate, your repayments can go up and down during the mortgage term. Traditionally, however, you get more flexibility to pay extra off, extend the term or top it up without penalty.
A fixed-rate mortgage means your monthly repayments will stay the same until the fixed period ends. With two-, three-, five-, seven- or 10-year fixes available, whatever happens to interest rates, your repayments will stay the same as the day you fixed.
While this brings certainty, if rates go down, your payments won’t drop. If you want to break the fix, there may be a penalty, and options to overpay or top up your mortgage may be limited, depending on the lender. Check this before fixing.
While no one has a crystal ball to say where rates will go, you can try reading the runes when considering how long to fix for.
"We believe that in the short to medium term, there is downward pressure on interest rates. It may be due to competition amongst banks and possible new lenders," says Joey Sheahan of mymortgages.ie and author of The Mortgage Coach.
"The lowest rate available today is 2.2 per cent with Ulster Bank over a five-year fix, over €300,000 and it's less than 80 per cent loan to value. But we are seeing the rates edge every closer to 2 per cent. Eight months ago or so, they were closer to 3 per cent, so we think a three-year period is a reasonable period to fix. If in the short to medium term you thought rates would increase, you could look at fixing for longer."
"Rates are historically low; there is no pressure on rates increasing any time soon," says Trevor Grant of Affinity Advisors and chairman of the Association of Irish Mortgage Advisors. "The reason you would fix is because you want to get a better deal than you are on now but you shouldn't be saying 'now is the time to fix, this is definitely the best deal I'll get', because no one knows whether rates will fall much more."
While he says its difficult to see rates falling significantly more, unless they have a tracker, consumers should constantly review the rate they are on. “If the rate will make significant savings for you, you can only make a decision based on today, you can’t forecast the future.
“What we are seeing is that most customers fix for at least three years and no more than five,” says Grant. “There doesn’t seem to be an appetite from Irish borrowers to fix for more than five years.” Seven- and 10-year fixes are also less popular with consumers shy of lengthy ties. Also, rates, relative to three- and five-year fixes, are less competitive.
Sheahan agrees: “The average we are seeing is three years.” For first-time buyers, fixing enables them to budget during an expensive period, protected from unexpected interest rate rises.
How to fix
Trying to figure out if you’ll gain by fixing? It’s not that complicated. Call your lender today and find out what your current mortgage rate is, the outstanding balance, and the remaining term and confirm your monthly repayment.
Get an idea of what your house is worth too. Recent sales in your area of houses similar to yours will be a guide. If the value of your home has risen since you borrowed, that’s good news. Some lenders offer better rates for lower loan-to-value balances.
Then either get on to a broker or do the legwork yourself.
Try the mortgage switching calculator on the Competition and Consumer Protection Commission website as a first port of call. This will tell you whether you are paying over the odds.
If you save most by fixing with your current lender, you will just have to factor in the cost of a valuation by the bank’s panel of valuers. This ranges upward from €140. “You fill out a form to request a valuation and you tick a box to change your rate. Its as simple as that really,” says Grant.
If you need to move lenders, you will need to add the cost of legal fees into the bargain. “Contact your solicitor to get a quote,” says Grant. “They will have already done the certification of title so they shouldn’t be charging the same amount as they did when you bought the property.”
Fees can range from €1,500 to €2,750, he says. So shop around. With most lenders now offering to cover the cost of switching, that might be covered too.
“If you have 80-90 per cent loan to value, the best deal I am seeing at the moment is with KBC if you open the current account with them,” says Grant. “You could fix for three years at 2.35 per cent and they will contribute €3,000 towards the cost of switching.”
For those borrowing less, Ulster Bank’s five-year fix at 2.2 per cent will see them contribute €1,500 towards costs and the bank will pay the valuation cost. Both lenders will facilitate overpayments, but with limits, he says.
All lenders must write to you 60 days before your fix ends, advising the new rate. They must also direct you to the Competition and Consumer Protection website, which outlines all rates in the market.
In a fix?
If you are already locked in to a fix but rates have dropped, all is not lost. “We should all review what rate we are on, even if we are on a fixed rate, because with some lenders the cost of breaking is relatively low,” says Grant.
So if you fixed at 2.6 per cent for five years 18 months ago but your lender is now offering 2.2 per cent, ask them to issue you a letter stating your break fee.
“Lenders are entitled to recover any loss they have incurred when you are breaking the fixed-rate agreement,” says Grant. “So establish the figure and weigh it up over what savings may be made over the new fixed-rate period.” If it’s a move to a new lender, they may well contribute financially to your switch.”
Joey Sheahan cites a client on a four-year fix at 2.6 per cent who was able to exit to a five-year fix of 2.2 per cent for a break fee of €380. “She’s being hit with an exit penalty but it’s worth paying because she will save about €1,500 a year.”
Others are not so lucky, with one bank quoting a break fee for a similar scenario of over €8,000. Whatever you are quoted, ask for it in writing.
One barrier to fixing is the fear that rates will drop even lower, leaving you to repent. On the flip side, if you wait, you are missing out on savings in the interim.
“Weigh up what saving you can make today, versus what’s you are paying today,” says Grant. You can only make decisions based on the facts in front of you. “You can’t beat yourself up in nine months because you are locked in at 2.2 and you can get 2 per cent now. The 0.2 per cent differential is not going to make that significant a difference.”
Shopping around, either with your existing lender or by switching to a new one, will ensure you are on the best rate. It should drive lenders to more keenly compete too.