Should I fix my mortgage rate now?

ECB interest rates have dropped to a historic low of 1% as of this week. Anyone on a tracker or variable rate mortgage will have benefitted to the tune of up to €500 or €600 a month in reduced mortgage repayments.

With these low rates, is it time to lock in your mortgage rate now to benefit from lower rates in the longer term? This would insulate you against any interest rate rises in the coming years – your payments would be unchanged no matter what the ECB does.

The newspapers and airwaves are currently full of commentators telling us that given that rates “will never be so low” we should think about fixing our mortgage rates now. But remember, some of these commentators are the people who told us back in March 2007:

HOUSEHOLDERS struggling to cope with rising mortgage repayments face further crippling interest rate hikes. The spectre of further increases comes as new figures show that house-price growth has ground to a shuddering halt. Financial analysts predict that European Central Bank rates will rise to 4pc in June. That would leave borrowing costs at double the level of 18 months ago, knocking tens of thousands of euro off the prices first-time buyers can pay. But some economists think 4pc will not be the peak, after news that money supply grew at the fastest rate in 17 years in the 13 countries which share the euro.

Rates didn’t go much above 4% after that, and have fallen steadily since.

The point I’m trying to get across is that what you do now is dependent on so many outside factors that it’s almost a pure gamble on what to do now.

And therefore, coming to a decision now is pretty much exactly the same situation that people were in back in 2006 and 2007 when they read and listened to all the commentary out there and decided to fix their mortgages for 3 or 5 years, and who are now complaining about the fact that they’re not getting the benefits of falling interest rates.

So what of the advice to fix now? Well, if you fix now, you’ll pay a little more now for the privilege of getting a fixed rate, but if interest rates go up, you’ll eventually begin to benefit since you’re repayments won’t increase.

But what if the recession lasts longer than anyone expects – given that it’s arrived when many “experts” didn’t expect it at all, and others didn’t expect it to be as harsh as it is. What if the ECB needs to keep rates at 1% for a significant period of time? What if they found that they had to drop rates even further, to 0.75% or 0.5%? In these situations, you’ll end up paying more in your repayments than you are now, and you’ll end up bleating about being caught in a fixed rate mortgage the same as many are at the moment.

Your mortgage is anything from €100,000 to €500,000 or even more. Making any decisions now based on what people are saying on the radio or writing the newspapers, as has been shown in the past, is a complete lottery.

Think long and hard about what you want to do. Speak to some independent professionals. Consider your personal monetary situation and how much you’re paying now versus what you can afford to pay in the future and how that would look if rates when up, went down, or stayed the same and if your income changed dramatically up, or more likely down.

Then make your decision. And when you do, if it doesn’t go the way you like, remember that there’s only one person to blame if it doesn’t go the way you want or expect. You!

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2 Responses to Should I fix my mortgage rate now?

  1. Gerard May 11, 2009 at 10:26 #

    You could also look at the option of fixing a percentage of your mortgage and leave the balance ‘floating’.

  2. Colm May 11, 2009 at 10:47 #

    I wouldn’t panic yet. You need to know what the signs are. Specifically Inflation in France and Germany. The ECB are hyper sensitive to inflation in France and Germany (they don’t give a damn about the rest of the eurozone). At the first sign of inflation in these two countries they will put 0.25% onto the rate in one of the following two ECB monthly meeting. If the inflation rate is low then they will flag it in one meeting and put it on in the following meeting. If the rate is high then they will react straight away and put it up.

    Generally the inflation data will be out a couple of weeks by the time this happens. The problem will be reacting before the ECB. Therefore I would advise you contact a mortgage broker now and explain what you want to do. Get all your ducks lined up in terms of the forms and information banks will look for and then be ready to move.

    Some mortgage brokers won’t want to know about this sort of a forward planning arrangement and will push you to fix immediately. Just walk away from them if they do. The good ones will know economics and will be already advising existing clients to get ready to fix.

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