Fixed-rate mortgages

In a recent article, it was claimed that some customers "should be able to redeem their fixed loans and swap into low variable rates free of charge. This applies to anyone who is on a fixed rate at a cost below that which now applies to these loans". Later there is reference to a zero redemption rate. Can you please explain this in more detail? How does it work and to whom might it apply?

Mr M.McG., e-mail

Believe me, you are not the only one interested in what, at first sight, appears an uncharacteristic piece of altruism on the part of the lenders. It is, after all, rare for any financial institution to give you something for nothing.

The truth is more prosaic; the only reason the switch from fixed rate to low variable rate loans is available in certain instances is that the bank can make more money by relending your fixed rate money.

This is how it works. Thanks to the sudden fall in interest rates with the arrival of Bank of Scotland into the Irish mortgage market, a large number of people who took fixed rate loans at around 5 per cent in recent years suddenly felt they may have made the wrong decision.

At the same time, although the arrival of Bank of Scotland has forced the Irish lenders to accept more reasonable margins on their loan products, the trend in global interest rates over the medium term is up.

Money lent for fixed-rate mortgages by the banks and building societies is borrowed on the basis of these medium-term rates. These rates are higher now than they were a year ago and, so, banks have raised the fixed rate offered to customers.

If you are a customer on a fixed rate taken out a year ago, the bank or building society can earn more on that money by lending it out to new customers at higher rates of interest than you are paying. At the same time, you benefit because of the lower rates on interest currently available on variable rate loans. Of course, you do lose the element of security implicit in knowing the rate you will pay over the whole period of the fix on the loan.

The juxtaposition of falling variable rates and rising fixed rates is unusual and attributable to the increase in competition in the mortgage market more than anything. It is always possible that Bank of Scotland, which currently offers only variable rates, will offer competitive fixed rates in the future which might, again, force a re-examination of these rates by the banks.

Of course not everyone on a fixed rate will benefit. It depends really on the attitude of the lender and the way redemption penalties are calculated. If the redemption penalty is worked out on the basis of the cost of the money to the lender, you should not be facing any redemption penalty as the bank can lend the money at a rate more beneficial to itself.

If, however, your lender has a flat rate redemption penalty of three or six months, it may not be worth your while moving loans. The lender may well seek to impose such a charge regardless - partly to dissuade people from changing their minds on what is, in effect, a contract.

However, it is worth one's while approaching such lenders as they will be able to lend on such money at rates which are better for themselves and few will refuse the chance to improve their bottom line, quite rightly.

Of course, all of this really only applies to those who took out fixed rate loans in the years or so between the collapse in such rates in the run-up to EMU and the return of rising fixed rates last August. It is of little consolation to those who took out longer term fixes in earlier years as the rate of interest they are paying is still higher than the lenders can achieve elsewhere.

Bereavement and legal advice

My boyfriend's mother died six months ago unexpectedly and in her last will and testament, she left all of her estate to her partner (her partner's will provided for all his estate to go to her, should he have predeceased her). In the event of both their deaths, my boyfriend would have been sole benefactor.

This partner was not legally married to his mother and is not his father. My boyfriend is unsure whether to get legal advice as his mother's partner has offered to give him £10,000.

My boyfriend is 22 years old and unsure whether he should seek legal advice. Is the £10,000 a payoff? Can you please suggest the best course of action?

Ms P.G., Laois

Even without knowing the full details of your boyfriend's situation, I have no hesitation is suggesting that he should seek legal advice. I know that, at 22, £10,000 can seem a very large and attractive sum, but it is quite possible that he would be entitled to more than that from his mother's estate.

You outline some of the key features of his mother's estate, including a pension from her employment, life assurance, a share of an apartment and an outstanding accident insurance. One point of interest is that you say the accident insurance claim is being pursued in your boyfriend's name, as it cannot be done in the partner's name.

This raises a couple of issues. You do not say whether this accident claim is related to her death but it is true that such claims can be pursued after the death of the alleged victim of an accident. This is so whether one is talking about an existing action or not.

Such an action would be pursued by the executor(s) of the estate on behalf of the estate. You do not say who is the executor in this case, but it will be their responsibility to proceed.

However, if it is being pursued in your boyfriend's name, it would seem to infer to a layman like me that the intention would be that he be the beneficiary of any positive outcome of such an action.

Another point that is vague in the letter relates to the share in the apartment. You do not say whether the apartment is owned jointly with the partner or with someone else.

The basic legal position is that your boyfriend's mother had a responsibility to ensure that proper provision be made for him. Now, it is possible that his mother may have made ample provision for him prior to her death. Nonetheless, the fact that, at 22, he has been entirely left out of the will would lead me to speculate that he may well have grounds for a claim against the estate under section 117 of the Succession Act.

The wording of the wills would be important. If, as your letter states, the intention was that your boyfriend would be the sole beneficiary if both his mother and the partner were to die, it might be that the wording of her will allows the partner use of the assets - particularly her share of the home - during his lifetime with them passing to the son thereafter.

If that were the case, it would need to be clarified before the estate was dispersed.

As regards the payment offered by the partner, it is entirely possible that this is simply a gift made with the best intentions by the partner.

On the other hand, there might be other reasons why it is being offered. Regardless, and without any intent to impugn the partner's motives, the boyfriend should seek legal advice now.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 11-15 D'Olier Street, Dublin 2, or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.