Friday 18 October 2019

Fixed rate borrowers now taking all the pain


FOR people locked into fixed-rate mortgages, the latest cut in European Central Bank rates must be galling.

Last Thursday eurozone interest rates fell for the sixth time and are now at 1.25pc, down from 4.25pc last October.

There is also likely to be another cut in rates in May that would take them to just 1pc.

Those lucky enough to have trackers or standard variable rate mortgages, where banks have passed on the cuts, are quids in.

Tracker rates are set anything between 0.5pc and 2pc above the ECB rate. So those with trackers will now have interest rates as low as 1.75pc, and up to 2.25pc, as a result of the sixth cut in rates in six months.

For a family with a tracker who owe €250,000, monthly repayments will have fallen by €425 since last summer.

However, homeowners with fixed rates are envious about the succession of rate cuts that have seen the ECB rate fall to a record low.

Many of these people locked into fixed rates at a time when rates were rising. Between December 2006, when rates were 3.5pc, there were three rises before the first big cut in October last year.

A number of people who opted for fixed rates did so last summer when the indications from economists were that more rises were on the way.

And many first-time buyers opted for fixed rates because it meant they could borrow more. This is because the Financial Regulator insisted that those taking out tracker and variable rates were stress-tested to ensure they could cope with higher rates, but there was no stress test for fixed rates.

Now interest rates have crashed to unprecedented lows. We are living in exceptional times so rates have fallen by exceptional amounts.

People with fixed rates are stuck with uncompetitive deals, typically 5pc over five years.

The penalties charged by lenders for breaking out of fixed rates are often so large it makes no economic sense to ditch the fixed rate.

Most lenders charge between three and six months' interest on the mortgage in a break fee.

Unfortunately, there is little people who have fixed rates can do except console themselves that if they took out the fixed rate before last year they will have been on top then.

However, the large numbers of people stuck on uncompetitive fixed rates gives the lie to banks' claims that they are earning little on mortgages now that rates have fallen so much.

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