Wednesday 28 September 2016

Fixed or variable - which mortgage to buy our new home?

Liam Ferguson

Published 28/06/2015 | 02:30

Fixed rates are often dearer than variable, meaning that you pay a premium for the security of knowing exactly what your repayments will be for a set period of time
Fixed rates are often dearer than variable, meaning that you pay a premium for the security of knowing exactly what your repayments will be for a set period of time

We are arranging a mortgage to buy a new home at the moment. From the repayment choices we have been offered by our lender, we have narrowed it down to two favourites: variable at 3.89pc (APR 3.96pc) or fixed for three years at 3.85pc (APR 4.17pc). Which would you recommend? Brendan, Athboy, Co Meath

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Fixed rates are often dearer than variable, meaning that you pay a premium for the security of knowing exactly what your repayments will be for a set period of time.

However, there are some exceptions available at the moment where the fixed rate is actually lower than the variable. This is something of an anomaly that illustrates the uncertainty about the future direction of interest rates in general. Before making a decision, you should consider these points.

Although the ECB has little or no scope to reduce the base interest rate below its current rate of 0.05pc, it is conceivable that your lender may decide to reduce its retail rates during the next three years.

That said, it's anyone's guess if any such rate cuts (if they happen at all) will be big enough and soon enough that the average variable rate over the next three years falls below 3.85pc.

Fixed rates tend to be less flexible than variable. Although some lenders allow limited overpayments during a fixed-rate period, typically any large overpayments while in a fixed rate would incur penalties.

So if you think you will have the scope during the next three years to aggressively overpay your mortgage, the variable rate is the better choice.

Be careful of what interest rate will apply at the end of your fixed-rate period. This is known as the 'rollover rate'. There are examples where the rollover variable rate at the end of a fixed period is higher than the variable rate available for new customers.

Taking the above three points into consideration, as a very general rule of thumb if you can get a fixed rate that is lower than the available variable rate, my advice would be to take it.

 

My employer does not pay sick pay and I am considering starting an income protection policy to replace my income if I am out sick. However, I have a medical condition since birth. It does not affect my ability to do my job in any way. Will my application be automatically rejected? Paul, Tralee, Co Kerry

No. An application for Income Protection will very rarely be declined automatically unless the nature of the illness is that you will almost certainly be out of work for a long period because of it. A lot depends on the nature of the medical condition.

As part of the application process, you will be asked for some details of your medical history. The insurance company may ask your GP to complete a questionnaire to provide further information about your medical condition and you might or might not be asked to attend for a short medical examination.

Having gathered all the information they need, the insurance company will have four options open to them:

1. Accept your application at standard rates. This means that they don't believe that your medical condition puts you at a significantly greater risk of being out of work due to illness than someone without your condition.

2. Exclude the condition. The insurance company can decide to specifically exclude future claims that are caused by your existing medical condition, but cover you for claims caused by any other illness or accident.

3. Load the premium. If the medical condition means that you are statistically more likely to be out of work due to illness than someone without it, the insurance company may charge an additional premium, known as a 'loading', to compensate for the additional risk.

4. Decline the application. This is only likely if the chances of your being out of work due to illness is unacceptably high.

 

My husband and I have just had a baby and are looking into life insurance to provide for our child in the event of our deaths. We have mortgage protection. Should we simply increase this? Suzanne, Stepaside, Co Dublin

First and foremost, congratulations on the new arrival! I advise that people keep their life and mortgage protection insurance needs separate. The requirement to provide a lump sum for your child should not be mingled with the requirement to clear off your mortgage in the event of death.

Your level of life insurance cover should not be an arbitrary multiple of salary, as is common. You wouldn't insure your car or house for a random figure and neither should you insure yourself for one.

You or your adviser should calculate the income that your household would need to replace in the event of your death or that of your husband. Take into account child-minding costs and the fact that your monthly mortgage repayment would be taken care of by your mortgage protection policy.

Having calculated the figure that applies to each of you, it is possible to arrange life insurance cover that will simply pay you the replacement income you need every month, in the event of the death of a spouse.

Alternatively, you can calculate a lump sum that could be used to provide the same income replacement.

Email your questions to jcradden@independent.ie or write to 'Your Questions, The Sunday Independent Business Section, 27-32 Talbot Street, Dublin 1'.

While we will endeavour to place your questions with the most appropriate expert to answer your query, this column is a reader service and is not intended to replace professional advice.

Liam D Ferguson is principal of Ferguson & Associates & www.FergA.com pension, life and mortgage brokers.

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