Locking into fixed rate ahead of interest rate rises could save you tens of thousands

Fixing to save

Let us say you’re a FTB borrowing €300,000 over 30 years to buy a home worth €350,000. Some of the cheapest mortgages available to you are ICS Mortgages’ variable rate of 2.7pc (if getting a variable rate) or Avant Money’s ten-year rate of 2.4pc (if getting a ten-year fixed rate).

Your monthly repayments currently come to about €1,170 under the ten-year fixed rate of 2.4pc and €1,216 under the variable rate of 2.7pc, according to Dowling Financial. So even if interest rates remain unchanged for the next ten years, you would save about €5,500 in the first ten years of your mortgage by opting for the ten-year fixed rate of 2.4pc at the outset, rather than the 2.7pc variable rate, according to Dowling Financial.

If rates increase by half a percent

The savings up for grabs with the ten-year fixed rate would be even greater if the ECB rate – and in turn the variable mortgage interest rate – increases within the first ten years of your mortgage.

Let us say you took your mortgage out on February 28, 2022. On that date, the cheapest variable mortgage available to you was ICS Mortgage’s rate of 2.7pc while the cheapest ten-year fixed rate mortgage was Avant Money’s ten-year rate of 2.4pc. Let us say the ECB rate and in turn your variable mortgage rate increases by 0.5 percentage points six months into your mortgage (bringing your variable rate to 3.2pc) – and then remains at that rate for the next nine-a-half years of your mortgage.

Had you locked into the ten-year fixed rate on February 28, 2022 instead of opting for the variable rate of 2.7pc at the outset, you would have saved about €14,750 in interest in the first ten years of your 30-year mortgage, according to Dowling Financial.

If rates increase by one percent

Let us say you took your mortgage out on February 28, 2022 and the variable interest rate increases by one percentage point (from 2.7pc to 3.7pc) a year into your mortgage – and then remains at that rate for the next nine years. Had you locked into the ten-year fixed rate of 2.4pc at the outset instead of opting for the variable rate, you would have saved about €23,200 in the first ten years of your 30-year mortgage, according to Dowling Financial.

Indeed the interest savings in the first ten years could be even greater than these figures because you typically pay more interest in the early years of a mortgage than in the latter years, according to Dowling. This is because the outstanding balance on your mortgage reduces in time – and in turn, the amount of interest you pay also falls. “In a 20-year mortgage, it would typically take you the first 12 years to repay half of the capital [the original amount borrowed] and the next eight years to repay the other half of the capital,” said Dowling.

How to limit any hits higher interest rates could bring

TOP TIPS: INTEREST RATE HITS BE CAREFUL WITH BONDS AND COMMERCIAL PROPERTY
“People should assess the amount of bonds they hold in their portfolios,” said Brian O’Reilly of Mediolanum Asset Management. “If interest rates rise, bond yields typically rise as well – which in turn forces bond prices to fall. So even ‘safe haven’ Government bonds could be negatively impacted by rising interest rates.”
In equities, bond proxies (shares likely to offer safe and predictable returns) tend to be affected most by
rising interest rates, added O’Reilly.
Commercial property investments and utility stocks could be hit by rising interest rates, according to O’Reilly. “Real estate will probably find it more challenging if interest rates rise as property deals could get more expensive,” said O’Reilly.

GET A FINANCIAL CUSHION
“In light of the rising interest rate environment, it’s worth sitting down and looking at your finances – in particular, your discretionary spending,” said Trevor Grant of the AIMA. “See if there are any areas where you could cut costs if you needed to. You could find that there’s an extra €50 to €200 a month you could save if you tightened your belt. Put that money aside now, as it will give you some comfort in the event that rates do increase.”

SORT OUT PROBLEM DEBTS
Clear or reduce any expensive or other large debts which you have (such as credit cards, overdrafts, car finance or personal loans) ahead of any interest rate rises if you can – because this debt could become more expensive if interest rates go up. For the same reason, try to clear any mortgage arrears which you built up before, or during, the pandemic.
“Now is an opportunity for people who have expensive short-term debt to see if they can renegotiate that debt into a cheaper form – or if they have money sitting on deposit, to use some of it to clear credit card bills or other expensive debt,” said Michael Dowling of Dowling Financial.
CHECK YOUR PENSION
Annuities generally offer better value when interest rates rise but don’t expect a huge boost to your pension as a result. “While your buying power goes up if interest rates increase and you’re buying an annuity, your pension portfolio may fall in value, depending on the type of bonds you have [in it] – so the gain offsets the loss,” said Peter Griffin, director of APT Workplace Pension. “Higher interest rates could potentially put pressure on defined benefit schemes.”