MORTGAGE REPAYMENTS:Variable interest rates are on the rise and the only way to get some certainty is to switch to a fixed-rate mortgage – but with lenders starting to withdraw them from the market, is it time to jump in before it's too late?
AS EVERY GAMBLER knows, the house always, always wins, except, perhaps when the gamble is on the house. In this country, the casinos – disguised as banks – took a massive punt on tracker mortgages during the boom. They lost and have continued to lose every day since the property bubble went pop.
To stem the resulting massive losses, the banks have spent the last 18 months pushing up their variable and fixed rates, effectively targeting standard variable rate (SVR) mortgage holders and punishing them for mistakes the banks themselves made.
Rate hikes have gathered pace in recent weeks with four of the main mortgage lenders announcing hikes in their SVRs, their fixed rates or both, and at least one announcing that it was getting rid of fixed rates altogether.
First out of the blocks was Permanent TSB, which announced a 1 per cent increase to its SVR earlier this month. It then temporarily suspended its fixed rates for new customers and introduced immediate increases of between 2 and 3 per cent on its fixed interest rates for existing mortgage holders rolling off fixed or discounted rates. Its two-year fixed-term rate went from 5.25 per cent to 7.25 per cent, while the five-year fixed rate leapt from 5.75 per cent to 8.75 per cent. Its 10-year rate went from 6.1 per cent to 9.1 per cent. With increases of this magnitude it was clear that the bank was pricing itself out of the market. Not as clear, though, as the action of the EBS, which left the fixed-rate market last week.
EBS also announced a 0.6 per cent increase in its SVR, from 3.83 per cent to 4.43 per cent, while Ulster Bank increased its SVR by half a point from 3.85 per cent to 4.35 per cent, from March 1st.
KBC Homeloans increased its two-year fixed-term mortgage from 3.7 per cent to 4 per cent. The bank’s three-year fixed rate climbed to 4.45 per cent from 3.9 per cent and its five-year fixed-rate mortgage was hiked by 0.7 per cent, from 4.5 per cent to 5.2 per cent.
So with the market in such a state of flux and all commentators predicting that the ECB is to start increasing its rates later this year, is it time to fix? It depends.
The National Consumer Agency (NCA) has cautioned against surrendering tracker mortgages, describing them as gold dust, and advised anyone with a variable rate to see if they can cope with interest rates going up by 2 per cent and compare that with fixed rates currently on offer. It is sound and simple advice. Fixing should be viewed as a budgeting tool which will give borrowers peace of mind so they can continue to meet repayments.
For every €100,000 owed, a 1 per cent increase adds around €61 to monthly repayments. Someone with a €250,000 mortgage, over 30 years, with an SVR of 3.5 per cent is paying €1,122 a month. If the interest rate goes up by 1 per cent to 4.5 per cent, the new monthly repayment will be €1,266. If it goes up 2 per cent to 5.5 per cent, the new monthly repayment will be €1,419.
According to Karl Deeter, of Irish Mortgage Brokers, trying to second-guess the market in the long term is “an impossible art” and the time to fix, for many, has already passed.
He points out that this time last year Permanent TSB was offering a 10-year fixed rate from 4.6 per cent, compared with 9.1 per cent today. “The horse has already bolted,” Deeter says. “The smart money always goes first and the stupid money goes at the end.”
He recalls clients with seven-figure mortgages who left low-cost trackers early last year to sign up for 10-year fixed-rate mortgages to give themselves a degree of security until 2020, but he would not advise people to do that now.
Another reality is that, generally speaking, the banks that have the best fixed rates are reluctant to take switchers, so people have a lot less choice than was the case in the past. “There isn’t one answer to suit everyone, but what I would advise people to do is decide what premium they are willing to pay to avoid rate hikes in the future. If they are not willing to pay any premium then they have to take their chances in the variable market,” Deeter says.
“It is not you versus the market, it is you versus you,” says financial adviser Frank Conway of Moneycoach.ie. He says that while the switching-to-save window has closed for many, there is still value out there, particularly with AIB, Bank of Ireland and KBC Homeloans. “We have carried out a number of surveys and people say that they can handle a 1.5 per cent hike but not much more than that, so if you can find a fixed rate that is within that margin you could consider fixing.”
Broker Kevin McNerney says that all borrowers on a SVR should explore the options open to them, but stresses that it depends on the bank they are currently with and whether or not it would be worth their while.
“Someone with AIB could be on a variable rate of 3.49 per cent and could get a three- year fixed rate for 3.89 per cent,” he says. On a mortgage of €250,000 over 25 years this would increase monthly repayments by €53. They could also look at a five-year fixed at 4.39 per cent, which would up repayments by €123 per month.
“This may seem like a big jump but the chances are they will be paying a lot higher in the coming years so it could end up being a small price to pay in the short term for the peace of mind that comes with it,” he says.
Someone with Permanent TSB may currently pay an SVR rate of 4.65 per cent, which is already pretty high. “However, if they wanted to look at fixing, the options are not as appealing,” McNerney says. It offers a two-year fixed rate of 7.25 per cent which, on a mortgage of €250,000 over 25 years, would see their repayments increase by €398 per month compared with the SVR. A five-year fixed rate of 8.75 per cent would see their repayments increase by €645 per month.
“This is a staggering increase of over 50 per cent in their monthly repayments,” McNerney says. “I believe that if someone can get a good three- or five-year fixed rate, which is 1 per cent to 1.5 per cent above what their current variable rate, then it should be worth considering, provided they can afford the increase.”
He also injects a sense of reality into the equation. “There are only a couple of lenders who will look at ‘switcher’ business where the loan-to-value is less than 80 per cent.”
Whether someone on a tracker should consider fixing was once unthinkable but it does depend on the rate. For example, Permanent TSB was offering trackers a few years back at just 0.95 per cent above ECB, so the current rate is 1.95 per cent. If you are on a tracker rate of around 3.5 per cent – ECB plus 2.5 per cent – and can get a fixed rate at around 4.5 per cent, then it might be worth looking at the figures.
“I would definitely not advise anyone to give up a tracker rate without first speaking to a financial adviser. They can help you look at the figures and it may be possible to work out a deal with your bank whereby they could ‘buy’ your tracker rate from you for an amount of money that would be paid off against your mortgage,” McNerney says.
This whole concept of banks buying trackers from customers is relatively new but will become a lot more mainstream in the years ahead. Effectively a bank would offer to reduce your mortgage by a percentage if you switched to a SVR from a tracker. While some banks are doing this on an informal basis at present, the amounts they are offering to tracker holders are laughable – as little as 1 per cent of the mortgage.
If they offered to reduce your mortgage by one-third – effectively taking a hit now rather than being bled dry for the next 25 years – it might start to make a whole lot of sense. It would go a long way to resolving the negative equity crisis too.
