We are looking for advice on switching from a tracker mortgage with AIB to one of their fixed-rate green mortgages, which we can probably get at 3 per cent due to our loan to value (LTV) at this stage.
From July this year, we will have only five years left to pay on our mortgage. We are on a tracker rate of 3.1 per cent and are worried, with the war in Iran and energy prices pushing up inflation, that the ECB may increase its rate (it’s highly doubtful that it will decrease them again any time soon) and our monthly payments of €1,420 will increase again.
I have recently retired and have a very small pension but do not yet qualify for the State pension as I am 63. My husband is still working.
Some certainty in our mortgage repayments would give us peace of mind at this stage as there is not much of a difference at the moment between the rates, but any big increases could cause a problem. It’s a guessing game, we know, but we would welcome your advice. I’m sure there are plenty of other people in our position.
READ MORE
I have made initial enquiries with AIB and am waiting for a letter from it to indicate which bracket we would fall under in its LTV schedule, and therefore which green rate.
PS
The war in Iran has certainly upended a lot of assumptions. And that causes headaches for people who are being obliged to make significant financial decisions with limited insight as to what might happen next.
Before the US and Israel started bombing Iran, the mood music on interest rates had already been changing.
Expectations that we might see one more quarter point cut in rates had faded as the European Central Bank (ECB), which sets the tone for rates in the Irish market, started worrying more about rising inflation. We were even then at a point when rates looked set to stay where they were at best, with the balance of probability in relation to the next move changing to a rise rather than a further cut.
The war and the upheaval that has caused to oil supplies and global economic uncertainty has only exacerbated that position. Late last week, the head of the International Monetary Fund (IMF), Kristalina Georgieva, said that while the IMF had been expecting to raise its economic forecasts when it releases its World Economic Outlook on Tuesday, even the most optimistic of the range of scenarios it will present involves a downgrade in growth expectations.
“What we do know is that growth will be slower – even if the new peace is durable,” she cautioned.
So what does all this mean for you?
On the positive side, you clearly pay close attention to your mortgage rate, which is good news. With you now retired, budgeting becomes even more important even with your husband still working.
A €1,420 monthly bill is one thing; coping with the prospect of an uncertain rise in those payments is quite another.
So, yes, I do see the attraction of switching to a fixed rate, if only for the certainty involved.
As a general rule, I advise against moving off trackers. Tracker mortgages – which track the ECB’s main refinancing operations rate – have served their customers well over the last couple of decades, despite occasional spikes. However, your position is quite specific – and, importantly, there is not long left on your loan – so should you abandon the tracker now, or not?
On the basis of your monthly payments and the fact that you have just over five years left on your mortgage, the amount outstanding is less than €85,000. You don’t give the outstanding balance on your loan but I am assuming it is somewhere around €78,400.
In modern Ireland, that means you are well below the 50 per cent level in terms of loan to value – the size of your loan as a proportion of the value of your home.
You also mention green mortgage rates. These are only available to people with more energy-efficient homes so I am assuming your building energy rating (Ber) is B3 or better. That is generally the threshold for a green mortgage rate.
BERs run from A1 to G and, like school report cards, the closer to A1 the better.
If you do decide to switch, AIB offers a five-year green rate for an LTV of less than 50 per cent of 3.2 per cent, very close to your existing ECB rate. This will cost you around €1,414-€1,415 a month, according to Bonkers.ie and the mortgage calculator on the Competition and Consumer Protection Commission (CCPC) website, assuming my €78,400 balance is more or less correct – a saving of a few euro a month on your current bill.
You can get a fractionally better rate from PTSB – 3 per cent with a monthly payment of €1,408.75 but that locks you in only for four years, leaving some uncertainty for the final year. You would also incur costs of about €400 on legal and valuation charges for switching lender, according to PTSB, which might also put you off.
Its five-year green rate is 3.5 per cent for a monthly payment of €1,420.97.
However, if you do not qualify for a green rate – ie your Ber is C or lower – the picture is slightly different. The four-year PTSB option is still available, as it happens, but the five-year fixed rate available to you at AIB rises to 3.65 per cent.
In money terms, that means a monthly payment of €1,431.506. In fairness, that is just €11.50 a month ahead of where you are now and does still give that five-year certainty you are after. PTSB offers 3.5 per cent – for a payment of €1,426.23 a month – but those switching costs arise.
With the five-year PTSB rate, you can qualify for 2 per cent cashback – around €1,568 – but you need to be repaying the mortgage from a PTSB account which might not work for you.
You can get better rates on shorter-term fixes from AIB and others but that reopens the issue about certainty.
But what about the tracker? At 3.1 per cent, your tracker margin – the amount above the ECB rate charged on the loan by AIB – is 0.95 per cent, which is certainly good.
As a general rule, every quarter-percentage-point increase in interest rates at the ECB will add between €12.50 and €13 per month to a loan with an outstanding balance of €100,000 and a margin of around one percentage point.
Taking the midpoint of €12.75 and your presumed balance of €78,400, you are looking at a €10 rise in your monthly mortgage bill for every quarter point rise in the ECB rate.
So realistically, there is very little in this.
Yes, the general view – which is all I can offer as I am not a soothsayer on interest rates – is that the next move is likely to be upwards. Initially, that would likely be a quarter point, making little difference to you.
If it went further than that, that assessment might change but then again, over the five-year term, rates could also reduce again. The logic in raising rates is to fend off inflation but once we get past the war spike concern, the bigger issue could be economic growth, encouraging the ECB to once again lower rates.
The general view longer term, however, it that there is little scope for ECB rates to fall below their current level.
It’s all a bit like picking the winner in the weekend’s Aintree Grand National.
What is certain, on the information I have available, is that a five-year green fix with AIB, assuming you qualify for it, will lock in payments at just under your current rate – and end your mortgage a few months early. If certainty is the priority and you are prepared to forgo the possibility of a fall in rates at some point, walking away from your tracker seems to make sense for you.
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 with a contact phone number. This column is a reader service and is not intended to replace professional advice
