Is now the right time to walk away from my tracker mortgage?

I have a tracker mortgage with about 24 years left to pay. My rate is currently ECB +0.75%. I am considering a fixed rate which I can get four years at 2.35 per cent but not sure whether this is a good idea or not.

I am a bit worried about how high rates are going to get so switching seemed like a good option but giving up a tracker is also a tough decision for me. I know I have a good margin but also think rates may never go as low as they have been for the last number of years again. What would your advice be in this situation?

Mr JMcM

We’ve been so hard-wired into holding on to our tracker mortgages at all costs that it has become increasingly difficult to rationally look at the merits of competing offers. To be fair, for much of the past decade, the tracker option was the right choice – especially for someone like you who has a margin of just three-quarters of a percentage point over the European Central Bank rate.

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[ Stick or switch: What should tracker mortgage customers do? ]

But times are changing and that has brought with it uncertainty – for the first time for tracker mortgage customers.

The truth is there is no absolute right or wrong answer. You are – like everyone else, including the professional market analysts – making a guess about the future trend of mortgage interest rates.

What do we know? At present, your ECB +0.75 per cent rate means you are paying 3.25 per cent on your mortgage. And we are aware of the signals from inside the ECB, including yesterday from the Slovak central bank governor and ECB policymaker Peter Kazimir, that we will see at least a further two half-point increases in interest rates over the first half of this year. That brings the ECB rate up to 3 per cent and your rate up to 3.75 per cent.

They could go further. In part that will depend on how inflation across the euro zone reacts to the ECB interest rate policy. But then again there are other drivers of EU inflation right now, not least uncertainty about the fallout from the war in Ukraine.

On the flip side, you have in your pocket an offer of 2.35 per cent fixed for the next four years.

For the next four years, the answer is obvious: you are better off switching to the fixed rate. But it’s not as easy as that. You need to take a punt on what you think will happen after that. Because once you make the move away from the tracker rate, there is no going back.

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So what is happening with interest rates four years down the line? We do not know but lenders are betting that they are going to rise.

If you look at Avant Money, the Irish lender owned by Spain’s fifth largest bank, Bankinter, its 10-year loans are priced a full percentage point higher than its four-year ones – regardless of the loan to value. And they are all above 4 per cent.

It’s not that Avant is an oracle but they are one of the few lenders offering rates over that term so they have some experience in pricing them. Essentially they expect rates to be higher, on average, over the next 10 years than they will be over four years. Interestingly, looking at Avant’s current rates – which run over three, four, five, seven and 10 years – they appear to expect rates to be higher the longer into the future we go. Or, at the least, they are less confident about rates the further we look into the future and are adding a premium to try to ensure they are not exposed.

The other factor to bear in mind is that Irish banks have not really “right-sized” their fixed-rate products. Since the ECB started moving on rates in July, they’ve been content not to pass on most of the successive increases.

Largely this is because they are now getting interest on money they have on deposit with the ECB – as all banks do – where, before July, they were actually paying the ECB to look after that money. That swing has helped boost their margins and created a somewhat false picture on the fixed-interest rate side.

All of which is good for people locking into rates now but the banks will inevitably look to restore margins on their fixed rate products in the short to medium term which means it is almost inevitable that even if the ECB never moved higher on rates, the fixed rates available to you four years down the line will be more expensive that the 2.35 per cent you are weighing up now.

And what of ECB rates? The experience of the last decade is clearly anachronistic. Rates have been at historically low levels which means, by definition, we are most unlikely to be returning to zero interest in future.

Rates at the ECB have been as high as 4.75 per cent back in the early days of the euro though the general experience has been more modest than that.

If it were me and I had somewhere between five and seven years left on my loan, I’d be fairly comfortable taking your 2.35 per cent four-year rate and expecting to be relatively better off. Over 24 years, I simply would not hazard a guess. You would certainly expect the current interest rate tightening cycle would have come to an end four years down the line but it is impossible to say with any confidence what level ECB rates will be at that time, never mind how they might react to economic crises over the following two decades.

The bottom line is that it is impossible to say with any authority whether someone with 24 years left on their mortgage is better off jettisoning a tracker rate now for an attractive four-year fixed rate. The tracker you have is at an attractive margin. I’d be slow to give that up to step into the unknown but then maybe I’m just too cautious in my assessment. What I do think is that you would be well advised to talk to a mortgage adviser before making any final decision.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice