To fix or not to fix that's the question
You could save thousands by fixing your mortgage now -- but only if you are with the right lender, writes Louise McBride
SUN-KISSED Greece certainly isn't the flavour of the month in the European Central Bank. Yet although the debt-ridden country has pushed the eurozone into one of its worst crises yet, Irish homeowners may well feel beholden to it.
Not long ago, economists were predicting that the low ECB rate would start to increase this year, pushing up the mortgage bills of many recession-weary homeowners. But Greece's financial crisis changed everything and many now don't expect the president the ECB to increase rates at all this year. It could even be mid-2011 by the time it starts moving, according to Jim Power, chief economist with Friends First.
"It all depends on how much uncertainty and instability follows the crisis in Greece," says Power.
Any stalemate on the ECB rate however is no guarantee that your mortgage bills won't go up -- as 80,000 customers of Permanent TSB recently found out. On February 1, PTSB introduced its second rate hike in about six months. It now charges existing customers 3.69 per cent interest on standard variable mortgages -- up from 2.69 per cent last July.
Permo's standard variable rate is almost twice that charged by AIB (where the rate for existing customers is 2.25 per cent), and also more expensive than the rates charged by BoI and EBS. Many expect these lenders to follow in PTSB's footsteps -- regardless of what happens at the ECB. If that's the case, thousands more homeowners will see their mortgage bills soar.
"Irrespective of any ECB move I see another rate hike of 0.5 percentage points from Irish lenders by the summer," says Alan McQuaid, chief economist with Bloxham.
NCB's bank analyst Ciaran Callaghan believes it is "only a matter of time" before the Irish banks increase their standard variable rates "in light of the prohibitive funding costs that the Irish banks currently face".
In fact, some think that lenders could push up rates as early as next month.
"From March onwards, I believe that all lenders will increase their standard variable mortgage rates -- and that will include AIB, Bank of Ireland and EBS," says Michael Dowling of the Independent Mortgage Advisers Federation. "There's no doubt that they'll be looking to catch up with Permanent TSB."
Dowling believes AIB, Bank of Ireland and EBS will increase their standard variable rates by at least 1 per cent over the next year.
"That could take the form of one 0.5 per cent increase -- followed very quickly by another 0.5 increase," says Dowling. "Add an ECB rise to that and you could be looking at standard variable rates of between 4.5 and 5 per cent within 18 months."
If Dowling is right and standard variable rates reach between 4.5 and 5 per cent by the summer of 2011, many homeowners will end up paying twice as much interest on their mortgage then than they do today. If you're on a tracker, stay put -- and lenders cannot increase your rate unless the ECB rate goes up.
If you're on a standard variable mortgage though, your lender can increase your interest rate willy-nilly.
So what can someone on a standard variable rate do to avoid the prospect of rising interest rates?
"There is only one option -- a fixed rate -- but this may involve having to switch provider as there is a huge divide across the banks," says Karl Deeter of Irish Mortgage Brokers.
AIB, for example, has a five-year fixed rate of 3.86 per cent while the Permo charges existing customers a five-year rate of 5.75 per cent. So some people could save thousands of euro by switching from a standard variable to a fixed rate, but others could end up paying thousands more.