Home Economics: Decision to be made on fixed or variable mortgage
Answering your property questions
Published 06/06/2014 | 02:30
I've been offered a mortgage with AIB and need to decide whether to go for a fixed or variable rate. The variable is 4.57pc and the fixed is around the same. Does this mean interest rates are stable now, or should I take a chance?
Sinead replies: Interest rates are at a historic low as the European Central Bank continues to cut in a bid to stave off deflation – a far bigger worry for them that any inflation the Germans are concerned about.
However, banks like AIB, which have a huge number of loss-making tracker mortgages on their books, are set to lose even more as they try and shore up the gap.
This means that the only new loans on offer are Standard Variable Rate (SVR) and Fixed, and they certainly won't benefit from drops in rates from Frankfurt – they're the ones propping up the tracker customers.
However, the fact that there is so little difference between them (currently 4.66pc fixed for one year, rising to 4.95pc for five years) would indicate to me that they don't anticipate any immediate return of higher market rates.
So, it really comes down to your peace of mind. If you prefer knowing exactly what's leaving your account every month and don't want to be constantly worrying about ECB decisions, fix by all means, but I'm not a fan of five-year products. Go with two or three years and you won't lose out too much if it swings the other way.
An SVR means that you are subject to the vagaries of others, but in all honesty, what happens on tracker rates is unlikely to affect you too much.
Due to economic circumstances we've had to leave and let out our family home and rent somewhere less expensive. It sounds mad, but it's the only way to pay the mortgage as the rent is €400 per month less. However, I'm horrified to discover that the tax relief on my mortgage interest has stopped, making this saving less beneficial. What's happened?
This is a becoming a common problem for homeowners and it is important to understand some of the responsibilities you have acquired now that you have transitioned to being a landlord rather than owner-occupier. Christine Keily of Taxback.com explains: "Tax relief at source on your mortgage is only available on your principal private residence; therefore, once you start to rent out your property to a third party, you are no longer eligible for the tax relief at source.
"The net impact of this is that your monthly mortgage payments will increase and this may not have been considered when you made the initial decision to rent the property in order to save money.
"In addition once you begin to receive rent, this will be seen as additional income and will be subject to income tax. This income will need to be reported to Revenue via a tax return each year.
"Taxable rental income is computed on gross rent receivable less allowable expenses such as repairs, wear and tear and 75pc of mortgage interest (if PRTB registered). Unfortunately there is no longer tax relief available on rent payable unless you were doing so since December 7, 2010. In any event, mortgage interest relief is being phased out in 2017."
The Ryan Review
Commentators were finding their noses out of joint with the news that some banks are beginning to offer 35-year mortgages in a bid to chase the artificial housing blip that's emerged in Dublin.
Given that the problem is one of supply, quite how funding longer loans fixes this is anybody's guess.
While monthly repayments on a 35-year loan are one-third cheaper than those on a 20-year mortgage, you'll end up paying the same amount in interest as the original loan over the longer term versus half the amount over 20 years, so it makes no sense for the borrower.
But while we're on that theme, we're still in the penny ha'penny place.
A number of UK banks have had 40-year loans on their books for some time now, but none can hold a candle to Japan whose 1980s' sweeping depression resulted in the innovation known as multi-generational mortgages: yes, folks, 100 years long, passing through three generations, many of whom were happy to shack up together as the loan played out.
They, too, thought that longer mortgages would solve the chronic housing affordability in Japan, especially Tokyo, but what actually happened was that wealthy people used these long loans as an estate planning tool to avoid inheritance taxes. Doh!
Nothing changed on the supply side; banks still hoovered up the extra money and everyone was left in hock for a century.
Still ... maybe Ireland's different, eh?