With interest rates rising – and set to increase even more over the coming months – thousands of homeowners around the State are likely scratching their heads as to whether or not they should make a move. Where once, trackers were like gold, keeping mortgage repayment costs low at a time when the banks didn’t fully pass on historically low European rates to mortgage holders, times have changed.
Mortgage holders on one of the best tracker rates, of ECB+0.5 per cent, will have seen the interest rate applied to their borrowings rocket from just 0.5 per cent last year to 3 per cent today. This means repayments on a €100,000 mortgage have jumped by a quarter from €438 to €555, or by €117 a month. Should interest rates continue to rise, as has been signalled by the European Central Bank, these repayments could be as much as €580 or €593 by the end of the year.
This doesn’t necessarily mean that a tracker has suddenly become bad value, and any decision to give one up requires a clear head and a long-term financial plan.
Consider your options
If you’re on a tracker rate, you’ll have had three letters already over the past year, informing you that your mortgage has gone up; and likely more to come yet. No wonder then that Martina Hennessy, chief executive of mortgage broker doddl.ie, is fielding calls from people wondering if they should switch to a fixed rate or not.
“It depends on your circumstances and your own ability to repay and service debt, but it is becoming obviously more attractive to look at fixing,” she says.
If you do have a tracker, the first thing you should do is consider your options. Opting for a fixed rate may not even be a possibility for you, unless you can switch whoever currently owns your tracker.
This is because thousands of such products were sold to loan servicing companies such as Pepper, Cabot and Mars, companies that service thousands of residential mortgages on behalf of third parties. But these loan servicers are often not lenders, and thus don’t offer alternative rates.
Back in December, Pepper said it would offer fixed monthly repayments, but this is different from a fixed rate. So, if your mortgage is with such a servicer, your only option to come off a tracker will be to switch – and this likely won’t be an option for anyone whose mortgage has been in any way impaired in its lifetime.
If it isn’t, and you do have an option of switching – most likely to a fixed rate, as this is where the better value lies – it might be time to do the sums. This is because general advice doesn’t apply when it comes to making a decision on giving up a tracker.
“Everybody’s situation is individual,” says Michael Dowling of Dowling Financial.
How long is left?
For Hennessy, this is a key consideration. If just five years or so is left on the term of your mortgage, you might just want to give up the tracker and lock into a five-year fixed for the certainty it gives you.
If, however, there is longer on the term – and as Hennessy notes, many trackers were originally issued over 40 years, with the final products sold back in around 2008, “so some might still have a 20-year term remaining” – you’ve got to look to the long term in your decision making.
After all, moving to a shorter-term fixed rate product now will expose you to whatever the bank offers once that term ends. If rates are more competitive, this could work out okay; but if ECB rates fall, and bank rates stay the same, it could look like an expensive financial mistake.
“If you can withstand the latest increases, it may be of benefit to your future financial self to retain the tracker,” says Hennessy.
Dowling agrees, noting that you might want “to ride out the increases” at the moment, so you’ll see the benefit of your tracker over the remaining term if and when rates start to ease off again.
If the ECB drops the rate again, it may take some time for banks to drop rates – except on trackers where the terms oblige them to – unless new lenders come into the Irish market.
“What goes up must come down – but it will come down slower than it went up,” as Hennessy puts it.
What’s my margin?
What’s also important is the margin above ECB at which your tracker is pegged. Generally, the margin on the market when trackers were offered ranged from about 0.5 per cent at up to 1.45 per cent, with an average of about 1.1 per cent. At that average rate, it has pushed your loan interest rate on such mortgages to 3.6 per cent today – a significant increase from 1.1 per cent this time last year.
And Dowling has even seen trackers with a margin of 3 per cent over ECB. “It’s a significant factor in looking at whether or not you should forgo your tracker,” says Dowling.
With further increases as early as this week almost inevitable, such mortgage holders are likely to be looking at rates of about 4.1-4.5 per cent in the short term. So, if you’re at the upper end of this margin, it may swing your decision.
Ultimately, Hennessy recommends making your decision based on a longer-term financial plan. She says if you are giving up your tracker you should have a strategy. Are you going to consolidate your mortgage debt down to a new term, for example, and will the certainty of a fixed rate help you plan for college expenses/retirement, etc?
“If you’re giving it up for a three-year fixed rate now, or a five-year fixed rate, it doesn’t necessarily make sense to do so unless you’re under severe financial pressure. You might have a short-term gain, but then have the equivalent of 12 years left in your mortgage, and then you’re at the mercy of whatever Irish lenders are charging at the time. If you relinquish it, it’s gone; all lenders are clear on that.”
If you do consider a change, it’s likely that you’ll be looking at fixed-rate options. As Hennessy says, “variable rates are still terrible”, and not only that, you are completely subject to the whim of the bank if it opts to hike variable rates. With a tracker, any such movements come from the ECB, not your lender.
As Hennessy notes, a five-year fixed rate is currently a popular option, with the rates ranging from 2.45 per cent to 5.5 per cent. Opting for the higher rate could cost someone with a €292,000 mortgage over 25 years a hefty €30,780 extra over the five years in higher interest repayments.
“It’s so important to choose the right rate,” she says.
If you opt for fixed, another benefit you’ll be giving up, notes Dowling, is that you can make part payments at any time on a tracker mortgage – but with a fixed rate you’re limited to a fixed amount.
Trackers were once the mortgage of choice for small-time property investors. And, Hennessy says, they most likely still should be.
“For buy to lets, if you’re on a tracker, I personally would not recommend someone to give it up,” she says.
Indeed, while normal home loan rates might be around the 3.5 per cent mark, rates for investment properties are closer to 5 per cent, so likely considerably higher than current tracker rates. Moreover, interest on investment mortgages is tax deductible, so may not impact investors as much.
If you do decide to come off your tracker, and switch banks, you could also consider trying to get a cashback. A number of banks still offer this incentive.
At Bank of Ireland, for example, you can get as much as 3 per cent back on the value of your mortgage; 2 per cent initially and a further 1 per cent after five years. This means that on a mortgage of €100,000 you could get €2,000 up front and a further €1,000 after five years.
With AIB, you won’t get a cashback per se, but you will get a payment of €2,000 by switching to the bank.
Haven, AIB’s broker subsidiary, does offer a cashback, of €5,000, but it applies only to fixed-rate mortgages valued at in excess of €250,000. Watch out for exclusions however, as it no longer applies to the lender’s green four-year fixed rate mortgage. Permanent TSB also still has a cashback offering 2 per cent of the mortgage value.
Remember, that legal costs will apply (typically about €1,000-€1,500), so you need to factor this in also.
Hennessy says it’s important to do the sums if considering a cashback bump, as you will likely end up paying a higher rate for the cashback offer. However, she notes that the value of cash in the hand will outweigh the drawbacks for some people. While some people will need the cash for home improvements, etc, others will use the money to pay down their mortgage further.