Wednesday 18 July 2018

How to protect yourself from looming threat of rate hikes

Some homeowners could see monthly mortgage repayments shoot up by as much as €450 if EU interest rates start to spiral, writes Louise McBride

Interest rates
Interest rates
Louise McBride

Louise McBride

Homeowners could see their mortgage bills soar by a few hundred euro a month in a few years' time - if, as expected, European interest rates start to rise in late 2019 or early 2020. The extent that mortgage bills will increase by will largely depend on the size and cost of a borrower's mortgage - but a series of rate hikes could easily see many paying hundreds more to repay their mortgage each month in the early 2020s than they are today.

The European Central Bank (ECB) is expected to increase its main refinancing rate - the rate that has a direct impact on the mortgage repayments of borrowers with tracker mortgages and which also often affects the cost of variable mortgages - in late 2019 or early 2020.

Some economists believe that after a few years of rising interest rates, the ECB refinancing rate could climb to as high as 2.75pc or 3.5pc, according to a poll conducted by The Sunday Independent. As the rate currently stands at zero, such a climb would put many homeowners under pressure.

For example, a homeowner on a 30-year tracker mortgage of €250,000 could see their monthly mortgage repayments jump by almost €450 if the ECB rate increased to 3.5pc; while a homeowner on a variable mortgage of that size could see their repayments increase by even more.

European interest rates have been at record lows for nine years - so many of today's homeowners have never experienced mortgage interest rate rises before. It is not inconceivable however for rates to rise to 3.5pc: almost 10 years ago, the ECB rate stood at 3.75pc; in June 2000, it was 4.25pc.

So with at least 14 months to go before European interest rates start to rise (assuming they do), what can you do in the interim to protect yourself from rising borrowing costs?

Fix your mortgage

Fixed mortgages are a good way to shield yourself from upcoming interest rate rises as your monthly repayments will remain the same for a set period of time, regardless of rate movements.

Furthermore, as a number of lenders have cut the interest rates on their fixed rate mortgages in recent months, a fixed mortgage could work out much cheaper for you than a variable one. You can now fix your mortgage for three or five years at an interest rate of 3pc or less, even if borrowing up to 90pc of the value of your home - depending on your lender. By contrast, the cheapest variable rate for such a borrower is AIB's rate of 3.15pc; the most expensive is Bank of Ireland's rate of 4.5pc. Some of those that offer three-year fixed rates of 3pc or less include Ulster Bank, KBC and Bank of Ireland.

For those who wish to lock into a fixed rate for as long as they can, Ulster Bank offers a seven-year fixed rate of between 2.99pc and 3.29pc; while Bank of Ireland and KBC offer 10-year fixed rates of less than 4pc. Should you be borrowing less than 60pc of the value of your home from KBC, you could fix your mortgage for 10 years at a rate of 3.05pc. "We have never had 10-year fixed rates at lower than 4pc in the Irish market before," said Michael Dowling, managing director of the mortgage brokers, Dowling Financial.

"If you are not on a tracker rate or fixed rate currently, consider fixing your mortgage. A fixed rate is an opportunity for borrowers to cushion themselves from rising rates and also to review the interest rate with their existing lender. Borrowers should make sure the interest rate they're on matches the loan-to-value (LTV) ratio of their property."

The LTV is the percentage of the property price borrowed and lower interest rates are usually available to those with low LTVs. Should you have been repaying your mortgage for a number of years, this - combined with the uplift in the property market - could mean you have a much lower LTV than when you first took out your loan. Don't fix your mortgage if you are planning to move home soon as you are usually charged a breakage penalty if you come out of a fixed mortgage early.

It might be wise to grab a cheap fixed-rate mortgage now - in case lenders start to increase their fixed rates as the prospect of rising ECB rates nears. Indeed, KBC has already done so with its 10-year fixed rates. For example, before last March, it was possible to get a 10-year fixed rate of 2.95pc from KBC if borrowing up to 60pc of the value of your home. That rate is now 3.05pc.

Overpay mortgage

Overpaying your mortgage now can help to reduce the amount you owe on it by the time interest rate rises kick in. This should reduce the impact of higher interest rates on you: the higher your mortgage, the higher the impact of interest rate rises - and vice-versa.

You can overpay your mortgage by paying a lump sum off it or by increasing the size of your monthly repayments. Talk to your lender to make sure you get the full benefit of any overpayments you are making. Be careful about making overpayments if you have a fixed mortgage - you may have to work within certain limits or you may not be able to overpay your loan at all.

Avoid loan top-ups

Don't be tempted to top-up your mortgage - or to take on a large mortgage - while interest rates are low. Instead, do what you can to reduce what you owe on your mortgage - such as overpaying an existing loan, or borrowing no more than 80pc of the value of your home (if you can).

"Those who are most vulnerable to rising interest rates are those who have borrowed 90pc of the value of their home and those who have borrowed right up to the [mortgage lending] salary limits," said Dowling. "Before borrowing right up to your salary limits, ask yourself if you will be in a position to cushion interest rate rises."

Sort other loans

Unsecured credit, such as personal loans, credit cards and overdrafts, could also become more expensive if the ECB rate rises. Furthermore, lenders could push up the interest rates on some loans at a much higher rate than the ECB increases its refinancing rate by. "Interest rates underpinning hire purchase-agreements could creep up at a proportionately higher level than the ECB is likely to apply," said Ronan Coburn, forensic accountant with the Dublin banking consultancy, The Bottom Line.

Should you have expensive loans (such as credit cards), either clear them before higher interest rates kick in - or refinance them so you can repay the loans cheaper and quicker. "When interest rates start rising, you will have less income available to repay loans - so take the opportunity to do so now," said Dowling.

With almost 30,000 homeowners in arrears on their mortgage for more than two years, there are still many people who are struggling with debt. "A lot of these mortgage accounts have been in arrears for over five years; some for up to 10 years," said Paul Joyce, senior policy analyst with the Free Legal Advice Centres (FLAC), which offers legal advice to people in debt.

These near-30,000 homeowners who are already struggling with their mortgages are likely to find it even more difficult to cope with their loans when interest rates start to rise.

If you are unable to repay your debts or mortgage each month because you don't have enough income, try to come to a solution with your creditor. "Sit down with your bank and see if it will restructure the loan - so that you can be brought back to a situation where you can afford the repayments," said Michael Laffey, the regional manager with North Leinster's Money Advice and Budgeting Service (MABS). "You might for example extend the loan term - or restructure three or four loans into the one."
If restructuring isn't an option however (for example if you have taken on too much debt), you may need to consider a personal insolvency deal.

"You'd have to fear that once there's one interest rate change upwards, there will be series of rate rises," said Joyce. "Economically, things are better - but there are a lot of people in precarious employment and a lot of people struggling with high rent. The idea that a rising tide has lifted all boats is not something we're seeing yet."

Sunday Indo Business

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