The banks are being merciless in applying stiff break charges to those wanting to get out of a fixed rate mortgage, writes JACK FAGAN

THE SHARP fall in interest rates over the past six months has prompted many mortgage holders to look again at whether they should break out of high fixed rate arrangements even if it involves an expensive penalty.

Those on the dreaded fixed rates (ranging from 5.5 to 6 per cent over a two to three-year term) have watched with envy as interest rates have fallen, immediately benefiting those on the standard variable rate and tracker rate. The temptation to look for a better deal comes with each interest rate cut but there is a price to be paid for being released from a fixed rate. All banks are now demanding a break charge – essentially the cost difference between the rate the customer is on (typically 6 per cent on a three-year fixed rate) and the rate the bank presently charges in the market place – probably 3.1 per cent for a three-year fixed rate.

If the client has, say, two years remaining on the 6 per cent deal, it will calculate the cost of losing that loan over the remaining term of the loan. In a recent example, a first-time buyer who locked into a three-year fixed rate mortgage was told that the break charge would be €19,000. Nothing less.

Frank Conway of Irish Mortgage Corporation says that deciding whether or not to pay the break charge fee is a simple mathematical exercise. By looking at the cost of the break charge and then comparing it against the savings over the remaining term of the new plan – plus any other legal charges – would let the customer decide whether or not the move would be the right one.

On a broader issue, for borrowers wanting greater certainty in their financial planning, fixing into a low rate three or five-year deal may well be a good option.

AIB is offering a number of fixed rate deals, including 2.85 per cent for one year; 2.8 per cent for two years; 3.1 per cent for three years; 3.6 per cent for five years and 4.41 per cent for 10 years.

Conway says these are pretty good deals. “Whether or not the bank reduces these rates even further remains to be seen. However, it could be a good option against an eventual rise in the ECB base lending rate.”

The consensus is that interest rates are unlikely to move up again until there are some signs of an end to this recession. Not only are we not anywhere near that stage but it seems we are entering unchartered territory in this slump.

Irish Mortgage Corporation has identified three categories of lenders in the mortgage market – players, substitutes and spectators. The players are easy to identify as AIB, Bank of Ireland, ICS, Halifax and EBS who are all lending to first-time buyers and those trading up at a loan-to-value rate of 92 per cent. Not bad in this climate.

On the substitute bench we have Permanent TSB who are almost ready to play, lending 90 per cent of the purchase price to first-time buyers. Ulster Bank and First Active are somewhere between Permanent TSB and those in the previous category.

The spectators’ area has institutions who appear to be heavily involved but are really only watching what is going on. KBC will only lend up to 80 per cent for first-time buyers, but this lender is offering some attractive interest rates. Haven Mortgages is also lending at 80 per cent loan-to-value.

The banking climate for private investors could hardly be worse. For starters, lenders are looking for 20 per cent deposits and, even if they run with the investor, they are charging premiums of at least 1.25 to 1.75 per cent over the home loan rates. To add to the difficulties, many investors continue to be stung by a reluctance of some lenders to pass on the value of interest rate cuts on existing mortgages.

Overall, the mortgage market is ticking over but, while the number of approvals is relatively small, there are increasing signs of more properties being sold at much reduced prices. Irish Mortgage Corporation says that of 304 lender applications, 60 per cent of the mortgages were approved immediately with the number increasing to 75 per cent after additional documentation was provided.