Mortgage rates are at their lowest in over 40 years with fixed rates as low as 4.5 per cent now available. With rates this low, borrowers could be forgiven for thinking that this is as good as it is likely to get, but this is unlikely to be true.
Most lenders have yet to introduce the latest round of rate cuts. At the time of writing, only Irish Permanent and First Active had cut their rates in response to the last round of Europe-wide cuts in December, when official rates fell to 3 per cent, as many of the lenders are still jockeying for position.
But even when all these cuts are implemented, probably by February 1st, there are still likely to be further reductions. The cut prompted by the European Central Bank in December was a response to the deteriorating global financial position, with central bankers worried about the possibility of global deflation as order books dry up in the face of declining demand from many countries including Russia, Japan and Brazil.
In recent days, the president of the ECB, Mr Wim Duisenberg, and many of his fellow executive directors have been insisting that no further cuts are on the cards in the foreseeable future. But when pressed on what "foreseeable" means, they will only say it means until they next move rates.
That is something that many observers are expecting, if not over the coming weeks, then certainly by Easter. In contrast to the Irish economy, the big powerhouses of Europe, Germany and France, are not showing any signs of picking up rapidly from the last recession. Indeed, Germany may be slowing down again. After picking up slightly in the run-up to Christmas, German unemployment is once again on the increase, according to the latest figures, and manufacturing orders are declining. The ECB will not be worried about rising inflation in those circumstances and if it shows signs of dipping much below 1 per cent, could well cut rates again.
Interest rates of 2.5 to 2.75 per cent would be phenomenal by Irish standards, and could even lead to mortgage rates of just over 4 per cent.
The other factor which is pointing to lower mortgage rates in the post-euro world is the likely advent of competition in the mortgage field. Traditionally, Irish lenders have taken bigger margins than many in the EU or rest of Europe. Many UK lenders offer mortgages at only 1 percentage point over the so-called base rate while German mortgages are commonly available at just over 5 per cent for 10 years.
No continental or UK mortgage lender has yet come into the Irish market but the lenders are more than alive to the possibility. The bigger the gap they charge over the base rate, the greater the incentive to a foreign lender to come in and attempt to exploit the difference.
According to Mr Jim Power, chief economist at Bank of Ireland, variable rates at 5 per cent or below will be seen later this year. Currently, First Active and Irish Permanent are charging a variable rate of 5.5 per cent, while ACC is charging 6.45 per cent and Bank of Ireland 6.35 per cent.
However, for borrowers thinking of taking out a longer-term fixed rate, it is likely that these are close to the lowest they are likely to go.
According to Mr Power, five-year fixed rates should fall to below 5.25 per cent over the coming months, but this is not guaranteed.
But borrowers should remember that lower fixed rates than variable rates points to the probability that variable rates have further to fall. Many UK borrowers were caught by this around October last year when they jumped into fixed rates only to see the variable falling almost every month afterwards.
At the moment, five-year rates vary from 5.5 per cent from EBS and Irish Nationwide to 6.1 per cent at First Active, TSB Bank and National Irish Bank for existing customers. Irish Permanent is also charging more than most for existing customers, at 5.95 per cent.
Overall, according to Mr Power, borrowers may do better to move into a variable rate at the moment and see how the competition pans out over the next three to six months. But one of the risks is that long-term interest rates could spike upwards.
"If the US central bank, the Federal Reserve, began to increase rates, that would force European longer-term rates higher. This has happened before in 1994 when the Federal Reserve began to increase rates and in 1988 when it started tightening again following the 1987 crash," Mr Power noted.
But even if this were to happen the likelihood is that short-term, that is, one-year and below rates are likely to stay low.
The bottom line is that anyone who is risk averse, or who needs to know their repayments, will probably not lose out too much by going into one of the cheaper three or five-year loans. But if you wait, better deals may come through.
