One of the most popular topics on the ValueIreland.com website in recent months has been the dilemmas facing home mortgage holders when it comes to fixed and variable rate mortgages.
Those who are currently on fixed rate mortgages have enviously watched interest rates plummet in the past 9 months while their mortgage repayments have stayed the same.
On the other hand, those who have variable rate mortgages have profited from lower repayments because of those falling rates, but are now wondering if they should fix their interest rates in case rates go up again.
The European Central Bank has set its interest rate at it’s lowest ever level – now 1%. This compares to a rate from this time last year of 4.25%.
What happens next?
The last European Central Bank meeting didn’t change interest rates from their 1% level set in May.
Some commentators have taken that as a signal that rates will start to go higher. Others, remarking that rates can’t really go much lower, take it as a sign that the rate will stay at this low level for some time until economies across the world recover.
Last year, before rates fell, some commentators recommended that people fix their mortgage rates because rates were going to rise – before they duly collapsed. Some of those same people are now recommending that we fix our rates before rates increase.
Does anyone really know the right thing to do? For us homeowners, the unfortunate answer is that no one has a magic ball and can’t really tell how interest rates are going to go.
What can you do?
If you’re thinking about changing your mortgage, then it is important that you seek independent professional advice – basically, someone such as a financial advisor or a mortgage broker – someone who won’t profit by recommending you do one thing over another.
But here are a few things that you should think about, and some questions that you should find out the answers to.
Switching from Fixed to Variable
If you’ve watched the falling rates wishing that you’re mortgage payments would fall as well, you might be thinking of switching from a fixed to a variable rate mortgage.
The first thing you should check out is whether your mortgage provider will charge you a “break-out” fee to cancel your existing mortgage arrangement. This will be a contractually documented fee that allows the bank obtain some of the money it would lose by cancelling the mortgage contract.
The calculations to determine this “break-out” fee can be complex, but you should ask your bank what it might be, and ask how they calculated the number.
Before cancelling your mortgage, you should also check the market at the moment to see what the best offers are now for variable mortgages. With the continuing problems being experienced by Irish banks at the moment, mortgage deals aren’t as good as they used to be.
If you find a deal that you like, then compare how much you’ll save on your newer mortgage over the period of time that your current mortgage has to run.
When calculating your cost savings, don’t forget that you’ll probably incur some legal costs when switching mortgages, and may also have to pay for a new valuation as well.
So, for example, if you’re bank is going to charge you €10,000 to get out of the final 3 years of your fixed rate mortgage, but you’re only going to save €1,500 on interest repayments before you’re legal expenses, then it might not be worth while changing.
If you’re numbers show that you’ll save a lot more money than that, then all the better. However, don’t forget to include in your calculations what your repayments might be if interest rates start increasing again. A good mortgage advisor will be able to show you different calculations based on different interest rate levels.
Switching from Variable Rate to Fixed
Because no one really knows how interest rates are going to go, any decision you make when deciding to go for a fixed rate mortgage is approaching gambling territory. And given the amount of money involved, how much of a gamble are you willing to take with €200,000 or €300,000.
Therefore, the main factor that should determine whether you go from a variable rate mortgage to fixed should be your own personal circumstances.
A fixed rate mortgage, while slightly more expensive than a variable, will give you certainty on how much your mortgage repayments will be into the future. If you’re unsure about your future income, or have other upcoming expenses, then it can be of benefit to you to have that certainty.
You also have the security of knowing that if interest rates did increase, you won’t end up having to pay more until the end of your fixed rate deal.
Remember as well that you will still have to pay legal costs when switching mortgages here also.
While its always useful to keep an ear out for what others are saying about mortgage costs and interest rates, much of what you’ll hear is speculation so don’t always believe what you hear.
Your decision to switch mortgages should only really come down the result of a full review of your own financial situation now, and how you feel about your future finances. Get independent professional assistance and if the money adds up, then make the change.
But remember, think about those on fixed rate mortgages now – if you make a decision today and interest rates don’t go the way you expect in the future – make sure you’ve considered that as part of your decision – don’t gamble on it.