Your mortgage rate: should you fix it? Yes, you should

Several of the main providers have announced rate drops within the past few weeks. Joey Sheahan, head of credit at MyMortgages.ie, says switching to a fixed rate can save almost €200 a month on a €250,000 mortgage. He adds current fixed rates are particularly lucrative for those with over 20% equity in their home — less than 80% loan-to-value (LTV) ratio.

“Ulster Bank has just announced a raft of new fixed-rate offerings, and combined with the market expectation that the ECB will raise its base rate at some point during 2018, we expect to see people flocking to make the switch from SVRs,” says Sheahan.

The ECB rate has stayed at 0% for more than two years now; a much-anticipated hike would affect anyone with SVR or tracker mortgages.

Michael Dowling, managing director of Dowling Financial, says fixing your home loan at current rates would provide a nice bit of cushioning from any rate increase.

“The banks are competing with each other for market share, so we are seeing fixed rates considerably reduced from 12 months ago,” he says. “Fixed-rate mortgages are better priced than variable now. The cheapest three-year fixed rate is 2.85% with Ulster Bank, and the five-year fixed is also 2.85%, if you are a current account holder. The equivalent variable rate is 3.2%, and you will find a similar pattern with all the banks, with the exception of AIB.

“When looking at rates like that, it makes total sense to take out fixed. First, because it’s cheaper; and second, because we know rates will rise.”

Current rates and incentives

The rate depends on the amount you have borrowed, the length of your fixed term, and your LTV ratio, with higher LTV ratios attracting higher rates.

For a first-time buyer borrowing €270,000 for a house worth €300,000 — an LTV ratio of 90% — for a term of 30 years, the lowest fixed rate would be 2.85% on Ulster Bank’s four-year fix. The lowest SVR on the market would be 3.15%. The lowest fixed rate for borrowing €240,000 — an 80% LTV — would be 2.6% on the same product, while the lowest SVR rate would be 2.95%.

Garry Manning, of Omac Mortgages & Finance, says fixed-rate mortgages account for about 85% of the business. “Somebody might be paying 3.5% variable on a house they bought in 2010-12. Now, with the growth in value of their home, they can avail of, say, a four-year fix at 2.6% from Ulster Bank.”

One of his clients calculated that, with a 35-year mortgage started in 2012, switching to that product would shave about four years off the mortgage with the same repayments. There are also more long-term fixed-rate mortgages on the market. KBC and Bank of Ireland both have competitively priced 10-year fixed rates. These products may be of particular interest to anyone who thinks that the preferential fixed rates currently available may not be quite so low in the future.

“There’s a view in the market that fixed rates are at a low point now,” says Manning. There is also a distinct possibility that the Irish market will see the introduction of even longer-term fixed rates — as in America — possibly by the end of this year.

In terms of incentives, Bank of Ireland offers 2% of your mortgage in cash up front, with an additional 1% after five years. Ulster Bank offers €1,500 towards your legal fees, while KBC offers €3,000 plus 25% off KBC home insurance for one year for new mortgages. Permanent TSB offers 2% cashback up front and 2% cashback on your mortgage repayment each month until 2027. AIB will put €2,000 into your current account within two months of taking out the mortgage.

Potential downsides

The main downside of a fixed-term mortgage is that, should you come into a lump sum, you won’t be able to pay off your mortgage early without incurring penalty “breakage fees”. However, most banks will allow you to overpay up to a certain limit without charging extra. For example, Ulster Bank will let you make an overpayment of up to 10% of your outstanding balance each year without penalty.

Dowling’s advice — should you come into some money — is to then simply wait until the fixed period expires.

“For example, if you’re on a three-year fixed rate and after one year you get a lump sum, keep it on deposit and make the repayment before you negotiate what your options are after the three years.”

Historically, fixed-rate mortgage contracts had the breakage fee charged for those who wanted to switch to a different mortgage. This is no longer the case, however, since the EU’s Mortgage Credit Directive requires banks to change how they calculate the charges. As a result, most banks don’t charge them any more and, even when they are applied, they are dramatically lower than in the past.

Switching mortgage

According to Dowling, your first port of call should be your current lender, as no bank wants to lose a customer.

“They will offer you whatever rates they’d offer a new customer,” he says. “If those rates are still not attractive, you have options.”

Sheahan says most SVR mortgage holders would make “significant savings” by switching to a new lender with a competitive fixed rate. He gives the example of a mortgage of €360,000 at an LTV ratio of 90%. With a remaining term of 30 years, switching from an SVR mortgage at 3.9% to a five-year fixed-term at 2.9% would mean a saving of €12,000 over five years.

Manning says that, while switching is fairly straightforward, it cannot be done overnight — and not everyone will be eligible.

“Switching does require commitment from the applicant. It’s not something you can do in five minutes on the computer. We do switches but if people are not committed it can drag on.”

You must qualify for the new loan within Central Bank guidelines. So, even if you were approved for a mortgage five years ago, your circumstances and your income might have changed in the meantime and this could mean you would not qualify for a new mortgage.

Assuming you do qualify and decide to switch, legal costs will generally amount to about €1,300-€1,500, and you usually have to pay a valuation fee of a few hundred euros. However, the various enticements offered by the banks to get people to switch should cover — if not exceed — such expenses.

Sheahan urges mortgage holders not to let apathy get in the way of saving potentially thousands.

“A mortgage is most people’s biggest monthly expenditure and yet it’s something people don’t pay enough attention to when it comes to getting the best value,” he says. “Many people assume that, once they’ve taken out a mortgage, that’s the end of the decision-making process.

“But mortgages are just like any other financial product — they should be reviewed every three years to ensure you are not paying over the odds.”