Watch for cuts in fixed rates

One small effect of the terrorist attacks on America have been declining interest rates as central banks around the world sought to restore order on world markets. This week the US Federal Reserve cut interest rates by half a percentage point, followed within hours by the European Central Bank. The cuts brought European interest rates down to 3.75 per cent and stabilised world markets and currencies to some extent.

But of course they also mean mortgage rates have come down. Most lenders have yet to move, with some still deciding what to do about the smaller rate cut announced on August 31st. The lenders, it appears, are becoming slower about passing on rate reductions and then the full amount has not always been passed on.

These initial reductions, now being applied by most lenders, amount to a monthly saving of around £14 (€17.78) for those with a £100,000 (€127,000) mortgage over 20 years. Assuming the latest ECB cut in rates is passed on, the monthly saving will rise to £43 (€54.60) on a £100,000 (€127,000) mortgage and £63 (€80) on a £150,000 (€190,460) mortgage.

Irish Permanent has been fast to act but this is for new customers and not for the existing customer base who will have to wait a little longer to see the full impact being passed through. Other lenders such as EBS have not yet announced their reaction to the first rate cut and both will now be considered together. Some of the other big lenders such as AIB are likely to make their announcements early next week but can be expected to pass on most of the rate cut.

All the lenders will be watching each other closely, particularly in the area of fixed rates. It is in this area that borrowers could possibly see real value. The most recent rate cut was simply not expected by anyone and therefore is not built into any of the fixed rates currently on the market. This means that substantial reductions in fixed rates are possible. The one-year fixed rates are already low and these will prove very attractive to first-time buyers seeking to cut their initial repayments. But it should be remembered that the best deal is probably with a lender who also treats existing customers to low rates.

Mortgage rates are expected to fall further. AIB economist Mr Oliver Mangan believes ECB base rates will be 3.25 per cent by the end of November while Ulster Bank economist Mr Aziz McMahon thinks they will be even lower at 3 per cent. This means that substantial further cuts in mortgage rates are probable. However, if the US and European economies pick up next summer, interest rates will quickly come back up. The Fed has practically admitted that these are once-off cuts in reaction to a real problem for the economy and are thus likely to be taken back next year - depending, of course, on what happens. But in the meantime, as the rates are coming down, some of the lenders may decide to offer real value in fixed rates. Certainly, any fixed rate over two or three years around 5 per cent and particularly below should be excellent value as it is most likely that rates cannot stay that low over such an extended period. So far only the one-year rates are at this level but mortgage holders should keep an eye out.

The problem, of course with fixed rates, is that you cannot get out without incurring a penalty and early repayment of your mortgage is not possible. So anyone who may come in for a lump sum over the period would not be advised to take it. However, many of the lenders do now allow borrowers to overpay a fixed rate. This would mean that you could fix at a low rate but make a larger repayment in order to bring back the size and term of your loan more quickly. Indeed this is good advice for anyone on a variable rate who is not strapped for cash.