Saturday 18 November 2017

When it comes to home loans, the future is going to be fixed

Fixed-rate mortgages: here to stay or a short-term response to overpriced variable rates? Dan White reports

More customers are opting for fixed-rate mortgages, with Bank of Ireland among the lenders ‘incentivising’ borrowers to choose them. Photo: Bloomberg
More customers are opting for fixed-rate mortgages, with Bank of Ireland among the lenders ‘incentivising’ borrowers to choose them. Photo: Bloomberg
Dan White

Dan White

Bank of Ireland says that most of its new mortgage lending is now fixed-rate, while KBC has introduced a cut-price, 10-year, fixed-rate mortgage. Are Irish homeowners finally following the European example and fixing their mortgages? Other banks aren't convinced.

Since the beginning of this year, 88pc of Bank of Ireland's new mortgage lending has been fixed-rate, the head of its Irish retail operations Liam McLoughlin told the Oireachtas Finance Committee last Thursday.

Existing Bank of Ireland customers also seem to be opting to fix their mortgage rates, with the proportion of its €24bn Republic of Ireland mortgage book on fixed rates, rising from less than 16pc at the end of 2015 to 26pc at the end of June 2017.

Something similar seems to happening at some of the other banks, with the proportion of new mortgage lending on fixed rates rising from 30pc in 2016 to 70pc so far this year at KBC Bank Ireland, according to its head of retail products Darragh Lennon. KBC recently unveiled a 10-year mortgage with a 2.95pc fixed rate.

So is the future fixed? Are Irish homeowners set to become more like their European counterparts and fix their mortgage interest rates for five or 10 years?

The large number of new and existing Bank of Ireland mortgage customers opting for fixed rates may not be entirely unconnected to the fact that, at 4.5pc, Bank of Ireland's standard variable rate is one of the highest in the market.

This compares with AIB's standard variable mortgage rate of just 3.15pc and Bank of Ireland's own standard five-year fixed rate of 3.35pc.

Outgoing Bank of Ireland chief executive Richie Boucher has been quite open about his bank's desire to encourage more of its mortgage customers to switch to fixed rates.

Appearing before the Oireachtas Finance Committee last November, he told TDs and Senators: "We are deliberately incentivising customers to switch to fixed-rate, as we believe the current rate environment is abnormal."

This means that, unlike its main competitor AIB, which has passed on ECB rate reductions and cut its variable mortgage rate five times, Bank of Ireland has kept its variable mortgage rate deliberately high in order to "incentivise" its customers to switch to fixed rates.

The contrast with AIB is stark. With its much lower variable rate, a far lower proportion of its mortgage customers have chosen to fix their rates, with just 10pc of its €32.7bn Republic of Ireland mortgage book on fixed rates. This is hardly surprising when one considers that AIB's standard five-year fixed rate is 3.3pc.

With the AIB standard variable rate now actually lower than its standard five-year fixed-rate, its mortgage customers are clearly far less "incentivised" to switch to a fixed rate.

KBC's standard variable rate of 4.25pc - 4.05pc if you have your current account with the bank - is also on the high side, meaning that many of its customers will also save a lot of money on their monthly mortgage repayments if they switch to a fixed rate.

So is the current vogue for fixed-rate mortgages merely the product of the pricing strategies of some banks? There is probably a bit more to it than that.

"We're probably not going to see an interest rate rise before 2019-20. However, when that happens, the fixed rates currently available won't be available then," warned one senior mortgage banker.

Even AIB, with its very low variable rates, hasn't stood entirely aloof from fixed rates, having recently unveiled a 3.5pc seven-year, fixed-rate product.

Traditionally, when Irish homeowners fixed their mortgage rates, it was for relatively short periods, typically three to five years.

The emergence of competitively-priced seven- and 10-year fixed rates is potentially a game-changer, allowing borrowers to lock in rates for much longer.

So should homeowners switch to fixed rates or continue to take their chances with variable rates? Even allowing for the fact that average Irish variable mortgage rates of 3.23pc are much higher than the eurozone average of 1.88pc, there is no doubt that we are currently in an era of extraordinarily low interest rates.

It might not be a good idea to bet on that continuing indefinitely.

Boucher was surely correct when he told the Oireachtas Finance Committee last November that: "If anyone is taking out a 20-year mortgage and they don't believe rates will rise, I'd ask them if they should be making this investment. It is an unrealistic proposition."

Traditionally, fixed-rate mortgages were much more expensive than variable-rate loans. In recent years, that premium has narrowed and in some cases disappeared entirely.

With the next major move in interest rates likely to be up rather than down, this means that homeowners should be thinking seriously about locking in the current low interest rates.

No matter how one slices and dices the numbers, Bank of Ireland's current 3.35pc five-year fix, AIB's 3.5pc seven-year fix and KBC's 2.95pc 10-year fix all look like very good value for homeowners seeking peace of mind as interest begins to trend upwards once again.

"Effectively, there is no premium over variable rates at the moment," says KBC's Lennon.

"Customers are aware of the interest rate environment. They want value and certainty for the long-term. ECB rates will go up in the medium term.

"Fixed and variable rates are closely aligned. That gives people comfort that they are not paying an excessive premium."

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