Have you been hearing the mood music? Central bankers have been softening us up for an interest rate hike when they meet in Frankfurt next week. If Irish banks react, it will likely drive up the cost of your mortgage.
If you’re buying a home, if you’re on a variable rate, or if you are nearing the end of a fixed-rate deal, it’s time to tune in to the music.
We love a fixed mortgage rate in Ireland. Some 70 per cent of Irish mortgage holders are now on one, noted Mark Cassidy, director of financial stability at the Central Bank of Ireland, last week.
Those who fix have the advantage of certainty about their monthly mortgage repayment for the period of the fix. Insulation from geopolitical and economic forces is a good thing too. But if your current fix is ending in the next 24 months, you are about to become more exposed.
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“Two-thirds of [fixed mortgage holders] will be exposed to higher interest rates in the next two years,” Cassidy warned.
“The finances of households and banks remain resilient to the impact of both higher interest rates and higher energy prices, but that is not to underestimate the difficulties for some, and particularly for lower-income households,” he added.
For those who fixed in recent years, rates have since gone up. And they may be about to go up again.
High oil prices are fuelling inflation and the European Central Bank (ECB) wants to get a handle on this. By raising interest rates, it increases the cost to banks looking to borrow money. Banks may then pass these higher costs on to consumers and businesses, making things like mortgages, car loans and business financing more expensive.
When money costs more, we spend less, lowering the overall demand for goods and services so that prices stop rising so rapidly.
“Certainly the markets are pricing in two to three increases this year,” says Conor McGowan, managing director of mortgage advisers Finance Solutions. “It’s hard to pin down, but certainly it looks like there will be something in June, and I expect that to be 25 basis points [a quarter of a percentage point].”
What this means for your mortgage depends on how your bank will react, he says.
Some, like the pillar banks – AIB, Bank of Ireland and PTSB – get a big chunk of the money they lend for mortgages from the cash we keep on deposit with them. Other lenders are more reliant on the markets or private equity to borrow the money they lend on, he says.
Banks have been preparing, or hedging, for possible rate increases so whether they pass on the ECB rate hikes or not will depend on how much cover they have, says McGowan.
Lenders will also be keeping an eye on what competitors are doing.
“It might be that they are happy to keep things where they are and [that] there will be a bit of a wait-and-see policy to see who blinks first,” says McGowan.
An ECB rate increase of 25 basis points next week, if it happens, equates to about €13 extra a month on your variable rate mortgage per €100,000 outstanding balance, he says.
“The average mortgage in Ireland is around €350,000 so that’s about an extra €45.50 a month on your repayment.”
Get prepared
Exactly what the ECB is going to do with rates and how your bank will react is Mystic Meg territory, but mortgage holders should start to get their “fingers on the buzzers” now.
“Call your bank and find out exactly what rate you are on, whether it’s fixed or variable and, if it’s fixed, ask when that period ends,” says Nick Charalambous of financial advisers Alpha Wealth.
Remind yourself too of the outstanding mortgage balance and the term of your mortgage.
Should you try and overpay your mortgage or invest instead?
The next step is to use the property price register to find out how much properties like yours are selling for in your area. This will tell you your loan-to-value ratio. For example, if homes like yours are selling for €600,000 and you have €300,000 left on the mortgage, your loan-to-value is 50 per cent.
If you bought your home five years ago, rising property prices could mean the amount you owe is now a much smaller percentage of the current value of your home. This increases your chance of bagging a better rate.
Find out your Ber (building energy rating) too, either by paying a Ber assessor to do one, if you haven’t already, or checking the national Ber register. Properties with better ratings can access lower-cost “green” interest rates.
Armed with this information, use a mortgage rate comparison calculator, such as the one from the Competition and Consumer Protection Commission (CCPC), or contact a broker to see what rates are available to you.
Browse rates
If you are one of the lucky ones who acted fast and locked in a fixed-rate mortgage four or five years ago, you have probably saved yourself thousands of euro. Perhaps you’ve been enjoying an ultra-low 1.95 per cent fixed rate with Avant, or a very respectable 2.4 per cent rate with Bank of Ireland.
If your fixed rate ends this year and you do nothing, you’ll roll on to your bank’s variable rate. This is likely to be significantly higher even now. At Avant and Bank of Ireland respectively, these are now 3.65 per cent and 4.15 per cent, rates that are not out of kilter with the wider market.
If the ECB raises rates next week, those variable rate will go higher again if your lender decides to pass on the increase.
“Be honest about how your household budget would cope if your mortgage repayments increased by €200 a month,” says Alpha Wealth’s Nick Charalambous. “Understanding your own position will help you make better decisions.
“If you are on a variable rate and concerned about future increases, it’s worth exploring your options now,” he says.
“We had a customer recently who rolled on to a variable rate of 4.15 per cent,” says McGowan. “If this new rate were to go up by 0.5 per cent this year, the monthly mortgage repayment would cost them an extra €107 a month.”
This homeowner’s mortgage was still at 90 per cent loan-to-value. If they had instead opted for Bank of Ireland’s four-year fixed rate of 3.15 per cent for their B-rated home, they would save about €200 a month on the variable rate, says McGowan.
Or take another homeowner in the commuter belt, soon to roll off a 2.4 per cent, five-year fix with Bank of Ireland.
They have a C-rated home with an outstanding mortgage balance of €240,000. Property prices have increased significantly in their area since they borrowed, putting them at a sub-60 per cent loan-to-value.
If they do nothing, they will slide on to Bank of Ireland’s current variable rate. This would see their rate climb from 2.4 per cent to 4.15 per cent, with their monthly mortgage repayments rising steeply by €223 a month.
If instead they decide to fix again with Bank of Ireland for two years, their rate would be 3.9 per cent with their repayments increasing by a smaller €194 a month on their previous fix.
Fix for either three or five years instead with that bank, and their rate will be 4 per cent with repayments increasing by €205 a month.
Whatever they do, their repayment is going to increase coming off their current fix but they have a choice that allows them minimise that increase.
“Fixing or staying variable is down to individual circumstances, but certainly the predominance is for fixed because it provides certainty,” says McGowan.
“If someone took out a fixed rate five years ago as a first-time buyer, they have built up equity in their property since then, so there are alternatives available to them now that weren’t then. There are new green rates available now too,” says McGowan.
A variable rate will be more suited to those wanting to pay regular lump sums off their mortgage.
Switching
The alternative open to those coming to the end of a fix is to switch banks.
For our commuter belt homeowner, switching to the lowest available rate for them – 3 per cent with PTSB for four years – means their mortgage will increase by about €90 a month, far less than if they were to stay with their own bank’s variable rate or fixed rates.
This PTSB rate is available for homes of any BER rating where the loan-to-value is 60 per cent or less.
Yes, this rate is higher than their previous ultra-low fix, but it’s €133 less a month, or about €1,600 less a year, than rolling on to their existing bank’s variable rate. That’s potentially €6,400 in savings over the course of the four-year fix.
Switching banks means legal fees of about €2,000, plus a valuation fee of €150 to €250. Stay with your existing bank and there is no need to get your home revalued.
Cashback offers can help towards this but it’s more important to make sure the overall rate stacks up.
Whether you are switching to a better rate with your own lender or switching to a new lender, you will need to provide things like bank statements and salary certificates to establish your repayment capacity.
Unless switching banks means a much more beneficial rate, stay where you are so you don’t have to go through the hassle, says McGowan.
“The people we advise to switch banks tend to be with those lenders who were very, very competitive a few years ago and now are less so because of their funding profile and it just makes absolute sense for them to move,” says McGowan.
He mentions the case of someone coming off an old ICS rate of 2.1 per cent. They will now roll on to a 4.45 per cent rate with that bank, he says. But, now five years into their mortgage, their loan-to-value is much more favourable.
“There are rates as low as 3 per cent out there with PTSB for those lower loan-to-values ... so you are looking at a difference of almost €260 a month in repayments. You have to factor in the cost of switching, but even with that, it’s quite a significant difference,” says McGowan.
New rules
New rules should also give homeowners a nudge to seek savings. In the past, your bank was only required to tell you that your fix was ending and what your new rate was going to be. This was typically a much higher, variable rate.
New Central Bank rules, however, mean lenders must now actively notify you of their best rates – and quantify in euro what those fixed and variable options mean for your repayment.
Sixty days before the end of your fixed-rate, they must write to you and tell you about those cheaper mortgage options, based on the equity in your home. Alongside each alternative mortgage refinancing option they offer, they must provide you with a savings estimate in euro, personalised to your mortgage.
This will show you how much you could expect to save by opting for their various fixed or variable rates. They must include the pros and cons of any incentives such as cashback offers.
Not only that but, four to eight weeks from their first letter, they must send you a reminder of your options.
These new rules mean you will have more data, incentivising you to take action on a better rate.
They won’t opt you into the best rate automatically, however, so you do have to act. They won’t tell you about better rates with other banks either. So when you get that letter 60 days out, it’s up to you to check if rates from other banks are better.
