Smart consumer: Worried over mortgage rates? Maybe it's the time to fix things
Published 25/11/2010 | 05:00
Mortgage holders are worried. Shaky banks with funding problems, the prospect of higher interest rates being imposed by the European Central Bank, and a whole raft of new austerity measures to hit from next month are weighing on people's minds.
Already some are struggling to meet their repayments, prompting many to wonder if now is a good time to lock in to the peace of mind of fixed rate.
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 you pay a premium for this certainty that your monthly repayments will not vary for the length of the fixed period.
The problem is the premium you pay is often so high that it makes it unaffordable for some to fix, according to Karl Deeter of Irish Mortgage Brokers.
Not that Irish people need an excuse to avoid fixing.
Fewer than 200,000 homeowners have fixed rates, out of a total number of mortgages of 788,000.
"Irish mortgage holders have long held a close love affair with variable rates, according to Frank Conway, the Director of the Irish Mortgage Corporation. "In contrast to a fixed rate, a variable can change at any time. Standard variable rates rise and fall whenever the lender wants to increase them."
They go up when the ECB raises rates. But even when there is no rate-hike move from the ECB, variable rates have a habit of rising.
In the last year most lenders increased their variable rates twice, with one increasing their rates three times in the space of 12 months.
Tracker rates are a form of variable rate mortgage, but crucially can only rise or fall when the European Central Bank (ECB) rate rises or falls.
They are set at a fixed percentage point above the ECB rate. So if your tracker rate is 1.5pc above the ECB rate, you will be paying 2.5pc at the moment.
Homeowners in arrears
At the moment, one-in-10 mortgage holders says their current level of mortgage repayments is a real problem, according to a survey conducted by Amárach Research for RTE's Frontline programme.
This chimes with figures from the Central Bank which show that 70,000 homeowners are struggling with their mortgage repayments.
This is made up of almost 40,500 mortgage holders who have not made a payment for three months or more. On top of this, another 30,000 people have had to do a deal to pay the interest-only on their mortgages because they cannot meet the full repayments.
But it is in the coming year that many mortgage holders expect to come under even more pressure.
The Amárach survey found that four-out-of-10 mortgage holders expect their monthly repayments to be a concern.
This is especially the case for those between the ages of 25 and 34, where half of the people in this age group who have a mortgage are concerned about meeting the repayments in the next year.
Those living in the commuter towns around Dublin are the most concerned about future repayments.
And these people are right to be worried. The head of the ECB signalled last week that eurozone interest rates could rise sooner than many market watchers expect.
Markets had not been expecting an interest rate rise until the end of next year, with some predicting no rise until early 2012.
ECB president Jean-Claude Trichet said the bank could raise interest rates before withdrawing all of its non-standard supports for European banks.
The ECB has held its benchmark interest rate at a record low of 1pc since May 2009 to help the eurozone economy through the global financial slump.
KBC Bank economist Austin Hughes says Mr Trichet's comments were a warning to everyone that interest rates might rise sooner than expected.
"This is a warning. The ECB is trying to disabuse the market of any sense rates will not rise," Hughes says.
Should I fix?
Interest rates could rise to 2pc in the next year and half.
It is a far cry from the early 1980s when interest rates in this country rose to as high as 21pc at one stage, but even a small rise in ECB rates from their current levels will put a lot of people under pressure.
One way of overcoming the problem of rising mortgage rates is to lock into a fixed rate.
Karl Deeter says: "Fixing your mortgage is basically like taking an insurance against future rate hikes by banks and the ECB, both of whom affect interest rates.
"At the price of an additional €85 a month on average for a loan of €250,000 over 30 years we believe it is worth considering a fixed rate seriously if you believe that rate hikes could adversely affect you."
The problem is many homeowners are offered very uncompetitive fixed rates from their lenders. The best rates tend to be reserved for new customers, with existing customers forced to pay much more to fix.
With almost 300,000 homeowners in negative equity, where the value of their mortgage is higher than the value of their home, switching to a different lender is not an option.
Take a homeowner with Permanent TSB. The lender has increased variable rates three times since the summer of 2009.
A new customer can get a rate of 4.3pc, fixed for five years. This will mean a monthly repayment of €1,225 for a €250,000 mortgage over 30 years.
The best an existing customer, on the other hand, can get will be 5.10pc. This will mean monthly repayments of €1,368.
Over a full year, the difference in repayments between the rate offered to the new and existing customer will come to €1,716.
Conway reckons first-time buyers should fix. This is especially the case as banks have eliminated much better tracker mortgages.
Existing mortgage holders who have limited or even no capacity for their mortgage repayments to increase should also consider the option of fixing, he added.
For those with a tracker, the decision on whether or not to fix is more complex.
As long as the expectation holds that the ECB will not increase interest rates too much then it makes sense to hold on to a tracker mortgage, Conway said.
"However, even tracker mortgage holders should be prepared to consider the option of ditching a tracker mortgage for the security of a fixed-rate deal if there is a concern that interest rates are to increase substantially," he adds.
The point is that mortgage holders, even those with tracker mortgages, should work out what their upper limit for interest-rate increases will be and base their decision on that.