Banks to abolish fixed-rate mortgages in bid to cut costs
Published 12/01/2011 | 05:00
Banks and building societies are planning to abolish fixed-rate mortgages because they are too expensive for lenders to provide, according to a leading mortgage expert.
Banks would prefer to have borrowers on products with variable rates, which can be increased whenever lenders want, according to Karl Deeter of Irish Mortgage Brokers -- who correctly predicted last year's rises in variable rates.
He said he was getting indications from lenders that fixed rates may be discontinued this year.
AIB will let an existing homeowner fix for three years at rates as low as 3.89pc. This compares with a variable rate of 3.3pc.
However, the swap rates (the market rate) that banks pay for money range from 7pc for two years to 11pc for five years.
"At those prices offering a fixed rate below the swap rates is nonsensical," Mr Deeter said in a report called Mortgage Market Trend Outlook 2011.
He blamed political pressure on state-supported banks including AIB, Bank of Ireland, EBS and Irish Nationwide for the fact lenders were offering loss-making fixed rates. This created a situation where there was a transfer from taxpayers to fixed-rate borrowers in state-owned institutions.
"This is the driver behind the demise of fixed rates in 2011," Mr Deeter said in his report.
Lenders that had not been bailed out by the State, such as Permanent TSB and Ulster Bank, were offering their existing customers higher fixed rates.
Homeowners in this country have shown a reluctance to fix interest rates, even though Mr Deeter estimates that variable rates will rise by at least 1pc this year. Most lenders pushed up variable rates twice last year. Lenders are free to increase variable rates at any point.
Mr Deeter advised homeowners on variables who are unsure of what to do to add 1pc to their current mortgage rate and see if they can cope with that. If not, they should fix.
"People in this country favour variable rates because they are cheaper but they won't be cheaper as variable rates are going up by 1pc this year," he added.
A fixed-rate mortgage is one where the interest rate does not change for a set period.
You can fix the rate for one, two, three, five or 10 years. But for this you pay a premium over the variable rate.
Fewer than 200,000 homeowners have fixed rates, out of a total number of mortgages of around 790,000. This is very low in comparison with other countries, financial experts have pointed out.
Economists reckon European Central Bank rates could rise later this year. That would mean both variable and tracker mortgage repayments increasing.
The problem some existing homeowners encounter when they want to fix is that the fixed rate offered to them by their lender is so high that it makes it unaffordable for many to fix, according to Mr Deeter.
Negative equity and the reluctance of most lenders to take on mortgage switches has left whole swathes of homeowners stuck with the fixed rates on offer from their existing lender.
He added that this year would likely see lenders making fixed rates even more unaffordable by hiking them, effectively shutting off the fixing option for existing mortgage holders.