Is the time right to abandon my rising tracker mortgage?

I’m on a tracker rate from 2005 and this is the first time the rate has gone up to 4.9 per cent. Looks like it’s better to go ahead and fix the rate for the next few years. It’s about €500 straight jump in the last few months. Any advice on this as I’m very concerned to see where this is going?

Ms N A

The last year or so has been tough on tracker mortgage holders, not least because they had such a long period of stability and historically low interest rates.

The relentless rise in rates over the past 15 months – nine rises in just 13 months and the most aggressive to date by the European Central Bank (ECB) – has been shocking for close to a quarter million households who are on a tracker rate. The current betting is that there will be at least one more rate rise this year, possibly as early as next month.

On the Money: the personal finance newsletter from The Irish Times

---

What would Sinn Féin’s ‘Robin Hood’ income tax policies mean for you?

---

I went to check our VHI cover but it had been cancelled over a year ago without us knowing

---

Temu accused of ‘manipulative’ sales techniques and lack of transparency

---

It highlights the need for consumers to remain alert to what is happening in areas that directly concern them, especially where their personal finances mean that they will struggle with strongly adverse movements in things like interest rates.

In 2005, when you took out your mortgage, the European Central Bank rate that you are tracking was 2 per cent, until December when it edged up to 2.25 per cent.

[ Cars, holidays and solar panels drive personal borrowing to record highs ]

I suspect you did hit the rate you are now paying in 2007 when the banking crisis was unravelling, albeit only for one year. More recently the European Central Bank interest rate has been at or below 1 per cent for a decade from 2012 to September last year – and for half that time, it was at zero.

For someone like you, on a tracker margin of just 0.9 per cent, that meant an extended period of payments that even you would not have considered likely when you took out your loan.

However, there were plenty of signals that rates were going to rise even before last July. The ECB was the laggard when it came to starting to ramp up rates in the effort to tame inflation. Most other leading central banks moved ahead of them. And many market analysts were advising people to consider their options at a time when there were some attractive long-term fixed rates on the market.

“Unfortunately not enough borrowers availed of the excellent long-term fixed interest rates available in the market a year ago, many of which have since been withdrawn by lenders,” Rachel McGovern, director of financial services at Brokers Ireland, said recently.

Is that fair? Quite possibly not.

Yes, there were low fixed rates available in the first half of last year and a lot of encouragement from brokers to lock into them. Many people did. Pretty much all mortgage business in the first nine months of last year was at fixed rates and there was a surge of mortgage switching as people did move to give themselves some security over the stability of future payments.

But many of those fixes are fairly short-term and may leave people exposed to much higher rates when they expire. And, of course, there will be no road back to a tracker even if they become better value again.

The fact that rates were so low so close to the dramatic cycle of ECB rate rises shows how little even the banks setting those rates understood the lengths to which ECB rates would go. Lenders are not in the habit of pitching their loans at rates which will be below the market rate over the term of the fix – and there were some rates on offer over periods of 15 or more years.

The current market view is that there will be at least one more ECB rise this year. That might be the top of the cycle, or it might not, depending on progress in reducing inflation

Of course, the Irish market is somewhat distorted in that much of banks’ funding for mortgages comes from savers – not the open market. This does mean that when banks are caught short – as they appear to have been by the pace of interest rate rises here – they can cope simply by refusing to give those depositors the benefit of the ECB interest rate rises. Individual borrowers don’t have the same luxury.

But what happens now? You need to consider two things – the affordability for you of the current interest rate and the likely direction of rates.

Affordability is a straight call. If current rates are creating financial problems for you, then you should certainly look at fixed rates on offer, not least because, after 18 years of a mortgage, your loan balance as a proportion of the presumably rising value of your home means you will be eligible for the most attractive rates on offer.

But how attractive are they?

Assuming your loan to value is currently less than 50 per cent, the best rate available is currently EBS’s variable rate of 3.3 per cent. However, variable rates can change at any time so give you no more security on payment amounts than the tracker currently does. Also, banks have been slow thus far to raise variables rates, presumably in part because they are now such a niche end of the market but they will likely do so as the current interest rate cycle matures.

On fixed rates the best options for switchers right now appear to be Avant’s three-year fix of 3.6 per cent for loan to value of less than 60 per cent and Haven (part of AIB), which is offering 3.65 per cent if you qualify for a four-year green mortgage fix with an energy efficient home. Either will save you money against your current tracker for now.

Whether they do so in the longer term really depends on the future direction of interest rates. As I said, the current market view is that there will be at least one more ECB rise this year. That might be the top of the cycle, or it might not, depending on progress in reducing inflation. Inflation is falling now but only slowly. It is still well off the ECB target.

That means that even if rates do not rise beyond 4.5 per cent (leaving your tracker at 5.4 per cent), they are not likely to fall for some time, possibly not even until 2025.

But when ECB do start coming down, tracker rates will fall. If you walk away from the tracker now, you will not benefit from that and will have to see what fixed rate is available to you in three or four years time when a fixed rate you sign up to now expires.

So is it worth abandoning your tracker? There is no “one size fits all” answer. It depends on how much you owe, what interest rate you are currently paying, what alternative rates are available to you at the time you are considering the issue, how long is left on the loan and the future direction of interest rates.

To give some indication, assuming your outstanding mortgage is €150,000 and you have 12 years left on the loan, you would be paying €47,500 odd in mortgage interest over the remaining life of the loan if tracker rates stayed at their current level, or €52,723 if they go up by another quarter point as expected and stayed there.

Of course, that’s most unlikely: interest rates will fall even if we cannot anticipate a return to the zero per cent ECB rate, bringing the likely interest bill down closer to €40,000, or potentially below it over the outstanding period of your loan.

On the flip side, a market-leading 10-year fix with Avant at 3.95 per cent, which is currently available, will cost you close to €38,000 in interest. If you took the best current market rate of 3.6 per cent for the three years and that rate continued to be available for the balance of fixed periods until your loan is repaid, the interest bill would be about €34,500.

Bear in mind that switching does bring some of its own modest legal and valuation costs. These should amount to €1,000-€2,000.

The bottom line is that the potential savings for you in moving at this late point in the cycle are lower. Should you move? Only you can decide.

You can use a series of helpful calculators at the Competition and Consumer Protection Commission website to help you decide. Make sure to use the switchers tab, which is the one most relevant to you. You would also be well advised to consult a professional mortgage adviser as part of any decision, given a home loan is generally the biggest financial commitment for any homeowner.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice