Do you really need a fix?

Aside from choosing a property, one of the most difficult aspects of homebuying is deciding between mortgage providers and the rates they offer.

Over the past couple of months, this part of the picture has been muddied slightly, with the battle between fixed and variable rates reaching one of its periodic peaks.

The (relative) excitement is understandable, since the fixed rates on offer have recently begun to edge up, marking a possible turn in the overall economic cycle.

Depending on your perspective, this development either means that now is a good time to fix (before the rates really start to climb) or that you have missed the boat on fixing at a rate that offers value over the long term.

Either way, mortgage brokers are noting significant interest in fixed rates among homebuyers, as stories of economic recovery begin to circulate and the prospect of an increase in variable rates becomes real.

Mr Liam Ferguson of Ferguson and Associates says there is a belief among his clients that if rates in general are low, then it must automatically be a good time to lock in. He does not agree, arguing that any attempt to beat the cycle by locking in at a low rate before variable rates begin to rise will be dependent on luck as much as any sound judgement.

"History has shown that trying to fix at the optimum time in order to get better value than prevailing variable rates is notoriously difficult," he cautions.

And if you need proof of this, cast your mind back to 2000, when two-year fixes of at least 6 per cent were the order of the day.

In June 2000, Irish Permanent was offering a five-year fix at 6.85 per cent. Three years on, the variable rate at the same institution (Permanent TSB) sits down at 3.55 per cent. That five-year fix would have led to a lot of needless repayments.

If, for whatever reason, a customer is seriously thinking about locking in, Mr Ferguson advises that they should consider a few key facts before signing any dotted lines. First, and perhaps most obviously, we have the penalties attached to breaking out of a fixed rate.

"This can limit your ability to switch lenders, re-mortgage or trade up to a bigger house using a different lender," he warns.

This is not to say that breaking a fixed rate is difficult - it is simply expensive.

" If you're prepared to pay the penalty, your lender will happily break your fixed rate," says Mr Ferguson.

For those in the unhappy circumstance of wanting to cast aside their fixed mortgage before the term is complete, Mr Ferguson advises that the best option will always depend on the individual case.

Deciding on value terms can be complicated however. He says the first thing to do is calculate the repayments for the remaining term of your fixed rate and then find out what your repayments will be on a lower rate.

Next, you should factor in the effect of a lower interest rate on actual capital repayments for the balance of your fixed rate period. Borrowers should, for instance, remember that they will repay their loan faster on a lower interest rate.

"Weigh all these up against the cost of breaking. Sometimes it works out in favour of breaking and in others not," Mr Ferguson says. As far as penalties go, these will again vary from case to case, with different institutions applying different charges.

Common break penalties include a bill for six months' worth of interest payments, while other lenders will calculate what they see as the cost of breaking the rate according to prevailing rates.

Mr Ferguson also points out that fixed rates tend to be inflexible and thus do not usually facilitate voluntary overpayments. And if they do, it tends to be within strictly-defined circumstances. ICS, for example, allows fixed borrowers to overpay up to 10 per cent of their loan balance, but no more. Others just rule it out entirely.