PERSONAL FINANCE: Your queries answered

Q

My mortgage with the EBS is variable and I have heard from a number of sources that now is a good time to fix. However, fixing for the next 10 years – which has been suggested by some experts as the appropriate time required – seems an awfully long time to tie myself down.

My question is, is there a cap on the interest rates that can be set by the ECB? My understanding was that 7 per cent is around the maximum that would ever be applied and the current EBS 10-year fixed rate is 5.95 per cent. I dread a return to interest rates in double figures, so any information you have would be much appreciated.

- Mr D.D., Wicklow

A

I agree that fixing for 10 years is a leap of faith. If you were to find yourself locked in at an uncompetitive rate, it could cost you tens of thousands to buy your way out of the contract. I have a long-held view – notwithstanding the reckless behaviour of banks in the recent past – that bank actuaries calculating fixed term rates rarely see their employers come out on the wrong side of the equation financially.

Having said that, you need to weigh up the proposed rate against the existing variable rate you are paying. From the beginning of last month, EBS Building Society’s variable mortgage interest rate is 3.23 per cent. If EBS was to raise its variable rate only when the European Central Bank (ECB) moved, that would require variable rates to be, on average, almost 2.75 percentage points higher over the 10-year term of your fix. It’s not impossible but. . . Of course, as variable rate customers have learned to their cost in the past few months, lenders, including EBS Building Society, have increased their variable rate without any action being taken by the ECB.

That May 1st variable rate itself marked a unilateral hike of 0.6 of a percentage point increase to customers who had previously being paying interest of 2.63 per cent on those same loans. And, in April when he was announcing results, EBS chief executive Fergus Murphy said it was likely that the building society – since effectively controlled by the Government – would raise rates by up to a further 0.6 of a percentage point before the year is out, bringing the rate to 3.83 per cent.

As lenders move to increase margins, it is very difficult to make a reasonable assessment of the level of interest rates over the next decade.

What I would say is that the ECB would be loathe to see its rates climb as high as 7 per cent, never mind above it. I am not aware that there is any legal provision prohibiting it, as such, but everything the ECB has said points to ECB rates being somewhere in the 2-4 per cent region. At present, the ECB rate is just 1 per cent.

The bottom line is that the main reason for fixing a rate is security. Notwithstanding the advice you have been given, I would be inclined to fix for a shorter period – say three, or at most five years, if at all.

One point of note is that EBS appears to be treating existing borrowers less favourably than new business. On its website, it displays the mortgage rates being offered for new customers. On that list, the 10-year fixed rate is 5.15 per cent (4.9 per cent APR) – significantly below the 5.95 per cent it is offering you.

However, as switching mortgages is difficult if not impossible in the current climate, you may have to choose what you see as the best available rate from within EBS’s offerings.

This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into

Please send your queries to Dominic Coyle, QA, The Irish Times, 24-28 Tara Street, Dublin 2. E-mail: dcoyle@ irishtimes.com