Your Money: The quick fix that could save you up to €17,000 on your mortgage
With higher interest rates looming for borrowers, now could be a good time to lock in your mortgage repayment arrangements, writes Louise McBride
Homeowners on variable mortgages could save as much as €17,000 on their mortgage over the next five years by locking into a cheap fixed rate, an analysis by the Sunday Independent and the mortgage brokers, Dowling Financial has found.
Interest rates have been at record lows for eight years and many homeowners have seen their mortgage bills dive as a result.
However, economists and banks are now warning borrowers that the European Central Bank's (ECB) main refinancing rate - the rate that has a direct impact on the mortgage repayments of borrowers with tracker mortgages - is set to rise within the next two years.
As well as pushing up the cost of tracker mortgages, any increase in the ECB's refinancing rate is likely to be passed onto variable mortgages - even though not all Irish lenders passed on ECB rate cuts to holders of variable mortgages in recent years.
The chances of getting a good deal on a fixed mortgage are likely to get slimmer as higher interest rates loom. The fixed rates available from banks could therefore be much more expensive this time next year. "I don't see fixed rates getting any lower," said Michael Dowling, managing director of Dowling Financial. "If you are considering a fixed mortgage, it could be wise to fix within the next year. Fixed rates tend to rise before variable rates do."
Only fix your mortgage if you will save money by doing so. Should you have a cheap tracker mortgage, it is very unlikely that you will save by switching to a fixed rate. The interest rate on some tracker mortgages is as low as 0.5pc - the cheapest fixed rate you can get today is around 3pc.
However, homeowners on variable mortgages - or first-time buyers about to get their first mortgage - should give serious consideration to fixed rates.
What you could save over five years
The Sunday Independent teamed up with Dowling Financial to see how much a first-time buyer could save over the next five years by fixing their mortgage. In this analysis, the first-time buyer is borrowing €300,000 over 30 years to buy a home worth €350,000. Dowling Financial compared the cost of the cheapest variable mortgage available to the borrower (AIB's 3.5pc rate) - to one of the cheapest five-year fixed rate mortgages available (the 3.55pc rate available from either Bank of Ireland or KBC Bank). Dowling Financial assumed the mortgage was first taken out on March 23, 2017 and examined a number of different scenarios - where interest rates increase by different amounts over the next five years.
A 0.5pc increase in interest rates
As interest rates currently stand, AIB's variable mortgage of 3.5pc works out €738 cheaper than the five-year fixed-rate mortgage of 3.55pc over the next five years.
However, let's say the variable interest rate increases by 0.5pc to 4.0pc on March 23, 2018 - and stays at that rate for the remaining four years. Had the first-time buyer locked into the five-year fixed rate in March 2017 instead of opting for the variable rate, he would have saved €4,634 in mortgage interest over five years, according to Dowling Financial.
A 1pc increase in interest rates
Should the interest rate on the variable mortgage increase by 0.5pc to 4pc on March 23, 2018 and by another 0.5pc to 4.5pc on March 23, 2019, the borrower would have saved €8,407 over five years by opting for the five-year fixed rate.
A 1.5pc increase in interest rates
Let's say the interest rate on the variable mortgage increases by 0.5pc to 4pc on March 23, 2018, by another 0.5pc to 4.5pc on March 23, 2019, and by another 0.5pc to 5pc on March 23, 2020. In this case, the first-time buyer would have saved €17,132 over five years by locking into the five-year fixed rate at the outset, according to Dowling Financial.
How high might interest rates go?
It's anyone's guess when the ECB might start to increase interest rates again.
Independent economist Jim Power believes the ECB will start to increase interest rates in the second half of 2018. Power believes the ECB's refinancing rate could stand at 2pc - up from its current rate of 0pc - by the end of 2019.
Dermot O'Leary, chief economist with Goodbody Stockbrokers, believes rates will start to rise in 2019 and will stand at 0.5pc by the end of that year.
"It could be the middle of next year before the ECB moves on its refinancing rate," said Alan McQuaid, chief economist with Merrion Capital. "I expect the rate rises to be modest enough. The refinancing rate could stand at 0.5 by October 2019. A lot depends on what happens with inflation in the eurozone - and with the elections in France and Germany."
KBC's chief economist Austin Hughes believes there could be an ECB rate rise as soon as mid-2018.
AIB believes that interest rates will rise by late 2018.
"While rates may start to rise around the end of next year, the market expectation is that the pace of increase will be very gradual, thereby maintaining a very low interest rate environment well into the next decade," said a spokesman for AIB.
Who is cheapest for fixed rates?
Ulster Bank offers the cheapest three- and five-year fixed rate mortgages to a first-time buyer borrowing just over 80pc of the value of their home. To get Ulster Bank's cheapest fixed rates (a three-year rate of 3.2pc and a five-year rate of 3.5pc), you must have a current account with the lender and borrow €200,000 or more.
Bank of Ireland and KBC are the second cheapest for three- and five-year fixed rate mortgages.
The most expensive lenders for three- and five-year fixed rates are AIB and EBS. Permanent TSB had been the most expensive lender for three- and five-year fixed rates. However, this weekend it cut its three-year fixed rate from 3.9pc to 3.6pc, and its five-year fixed rate from 4.15pc to 3.75pc.
Should you be borrowing less than 60pc of the value of your home, you should qualify for the some of the cheapest fixed rates. KBC, for example, offers a five-year fixed rate of 3pc and a three-year fixed rate of 2.95pc to those borrowing 60pc or less of value of their home. (You must have a current account with the bank to qualify).
Ulster Bank offers a three-year fixed rate of as low as 2.9pc, and a five-year fixed rate of as low as 2.99pc to those borrowing less than 60pc of the value of their home. (You must have a current account with the bank and borrow €200,000 or more to qualify).
"A five-year fixed rate of 3pc requires serious consideration," said Dowling.
Should you wish to fix your morgage for longer than five years, Bank of Ireland is the only lender offering a ten-year fixed rate. Ulster Bank's seven-year rate is the only other fixed rate you can get for longer than five years.
Should you be considering taking out a mortgage with Ulster Bank on the strength of its fixed rate offering, be aware that it's planning to close 22 branches. Many are in rural areas though a number of Dublin branches will also shut. So should your local branch be one of those set to close, it could be inconvenient for you to have your mortgage there.
To fix or not to fix?
Before signing up to a fixed rate, be sure you can commit to fixing your mortgage for the length of the fixed-rate term. You are usually charged a breakage penalty if you come out of a fixed rate mortgage before the term is up. This fee could easily run into the thousands - and in some cases, into the tens of thousands. Some reasons you might decide to come out of a fixed mortgage early include a house move or a decision to take up a cheaper mortgage offer with another lender. So be sure you are happy with the fixed rate - and its term - before signing up to one. Be sure too you'll save money by moving to a fixed rate - and that it won't cost more than your existing mortgage.
Sunday Indo Business