Don't just sit there, go out and fix that mortgage
By fixing the interest rate on your mortgage, you could keep a roof over your head -- and save as much as €6,000, writes Louise McBride
The State's bad bank, Nama, is certainly busy chasing businessmen through the courts. Last week, the developer Patrick Shovlin and hoteliers Patrick and Anthony Fitzpatrick found themselves in the spotlight after Nama won a court battle to recover multi-million euro in unpaid loans given to their companies.
These businessmen aren't the only ones feeling the heat over unpaid loans. About 36,500 homeowners ran into difficulties repaying their mortgage by the end of last June -- and almost 400 homeowners had their homes repossessed.
If you're struggling to repay your mortgage, where would you stand if your lender hiked your interest rate? Might you find yourself without a roof over your head? If so, it could be time to fix your mortgage.
If you're on a variable mortgage, chances are you'll be hit with a series of interest rate rises over the next few years -- regardless of whether the European Central Bank (ECB) rate -- which largely determines how much interest you're paying on your mortgage -- increases or not. For this reason, you could save as much as €6,000 by fixing your mortgage (see panel).
Even though the ECB rate has remained unchanged and at an all-time low of 1 per cent since May 2009, most lenders have increased their variable rates since.
"Banks are punishing variable rate customers [by increasing their own interest rates] and they will continue to punish them to make up for the losses they're making on tracker mortgages," said Michael Dowling, spokesman for the mortgage brokers, the Independent Mortgage Advisers Federation (IMAF). "Every time the ECB rate goes up, the variable rate goes up again so variable rate customers could be faced with two sets of rate increases. If you're on a variable-rate mortgage, get out of it."
IS THERE ANY REASON NOT TO FIX?
If you're on a tracker mortgage, stay where you are. Homeowners who snapped up these mortgages -- which are no longer available -- have the cheapest mortgages around. So if you switch from a tracker mortgage to a fixed-rate mortgage, you'll lose money -- unless interest rates start to rise again. And even then, you could struggle to find a fixed rate mortgage which will work out cheaper than a tracker.
Another reason not to fix is if interest rates start to fall -- rather than rise. However most economists believe this is unlikely. "Assuming the world economy regains momentum in the coming months, the ECB will want to start raising rates and get rates back up to around 4 per cent," said Alan McQuaid, chief economist with Bloxham Stockbrokers. "If the debt crisis in Europe shows no sign of abating over the next year, the first rate hike could be deferred until 2012, but I don't see there being any chance of lower official rates at this juncture."
McQuaid believes the ECB rate could hit at least 3.5 per cent by 2013. Jim Power, chief economist with Friends First, believes the ECB rate could increase to 4 per cent within the next five years.
"Given the robust nature of the German recovery and the relatively healthy economy of Northern Europe, the ECB would be loathe to cut official interest rates any further," said Power.
BE FUSSY WHO YOU FIX WITH
As you could pay over €13,000 more to fix your mortgage with certain lenders, it's worth shopping around. The cheapest three-year fixed rate you'll get is the 3.6 per cent offered by National Irish Bank (NIB). This rate is available to new and existing customers borrowing up to 92 per cent of the value of their home. At 3.89 per cent, AIB has the second-best offer for three-year fixed.
NIB also has the cheapest five-year fixed rate, at 3.95 per cent, followed by AIB (4.39 per cent) and the Education Building Society and KBC Bank (both offer 4.5 per cent). Permanent TSB has a 5-year fixed rate of 3.7 per cent but you must be borrowing no more than half of the value of your home to get this rate -- and existing customers can only get a rate of 5.75 per cent.
At 4.5 per cent, the cheapest 10-year fixed rate is also available from Permo -- but again, only if you are a new customer and are borrowing no more than half of the value of your home. Permo's 10-year fixed rate for existing customers is 6.1 per cent. NIB has a 10-year fixed rate of 4.55 per cent. AIB and EBS offer a 10-year fixed rate of 5.2 per cent.
If you've already got your mortgage with Permo and are considering fixing it, move to a cheaper lender instead. For example, if you've got a 25-year mortgage of €200,000 with Permo, your monthly repayments work out at about €1,269 under Permo's 10-year fixed rate for existing customers -- and €1,156 under EBS's 10-year rate. So after 10 years, you'll have paid about €152,309 to Permo -- €13,555 more than you'll have paid EBS.
Unfortunately, it's not as easy to shop around lenders today as it was during the boom years. AIB and Ulster Bank do not allow mortgage customers with other lenders to switch their mortgages to them. "Our primary focus is to support mortgage applications from people purchasing their own home," said a spokeswoman for AIB. "AIB is not actively seeking 'switcher' mortgages."
If you want to switch from an expensive lender to a cheaper one, Dowling says that your best bets of doing so are with EBS and KBC. To switch to EBS or KBC, your mortgage cannot be more than 80 per cent of the value of your home.
Bank of Ireland, National Irish Bank and Permanent TSB also told this paper they allow customers to switch their mortgages to them.
A spokeswoman for Bank of Ireland said the bank allows customers to do so "whether they are customers of Bank of Ireland or not -- but each case is assessed on its own merits". With Permo, the value of your mortgage cannot be more than 75 per cent of the value of your home if switching.
Remember, if you have missed mortgage repayments over the last few years, you're unlikely to have much luck switching lender.
Some lenders have started to hit customers with fees for fixing their mortgage. Ulster Bank has a €125 fee if you switch from a variable or tracker mortgage to a fixed one, Permo charges €100, and KBC charges €38.