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Fixing for longer may push up mortgage bills, report warns


Going up: Mario Draghi is expected to announce an ECB rate rise next year. Photo: AFP/Getty Images

Going up: Mario Draghi is expected to announce an ECB rate rise next year. Photo: AFP/Getty Images

Going up: Mario Draghi is expected to announce an ECB rate rise next year. Photo: AFP/Getty Images

The tendency of people to opt for longer fixed-rate mortgages in this country could make the product more expensive in the future.

This is because banks will have to find new ways to fund the rising level of fixed rate loans on their books, according to a new Central Bank report.

There has been a huge upsurge in mortgage holders opting for fixed rates.

This is to insure them against expected rises in the European Central Bank rate, which it's speculated will be announced by ECB President Mario Draghi next year.

A rate rise had been expected at the end of this year, but the sluggish pace of growth in the eurozone has meant the date has been moved.

People are opting to fix because mortgage-holders here continue to pay the highest variable rates in the eurozone.

The average interest rate on all new mortgages agreed in Ireland stood at 3pc in March, down 21 basis points on the same time last year, but still considerably higher than the eurozone average of 1.74pc.

Only Greece had higher interest rates in March, while Finland had the lowest at under 1pc.

Banks have been enticing homeowners to fix by offering fixed rates that are lower than typical variable rates.

Some fixed rates are as low as 2.3pc, compared with variable rates of up to 4.5pc.

But a new paper from Central Bank economists says most fixed rates taken up by homeowners in Ireland are for such short periods that they should be regarded as "teaser rates".

This is because the majority of new mortgages have rates fixed for between one and five years.

In other countries, fixed rates are regarded as those that last for more than five years.

All banks now offer five- and seven-year fixes, with some offering 10 years. But most people who fix opt for five years or less.

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The latest figures show that three out of four new mortgages taken out are some form of fixed rate.

Households gain from having fixed rates. This is because they avoid the risk of having to pay more if a bank has higher costs due to inflation, real interest rates rising or regulatory changes, according to the paper called 'Fixed-rate mortgages; building resilience or generating risk?' by Jane Kelly and Samantha Myers.

But the paper warns that fixed rates are due to become more expensive in this country as more mortgage holders fix for longer.

This is because banks will be forced to offset their inability to re-price mortgages if they are hit with higher costs by broadening out how they raise funds.

"While long-term fixed-rate mortgages can build household resilience by reducing variability in interest payments, this should increase the cost of a mortgage.

"Pricing risk is shifted from households to banks, who must then diversify it away through funding markets or through market hedges, and pass the costs of their risk management strategies through to households," the paper says.

A hedge is an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security.

If people chose to fix for longer then households can expect to pay higher average prices in return for the lower risk of having a fixed rate.

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