Anyone with a variable rate mortgage should immediately switch to a fixed rate – The Irish Times

It’s an uncertain time for mortgage holders. European Central Bank rates have gone from zero to 2% in just four months. A borrower on an ECB plus 1% tracker (a 1% margin on the ECB base rate) will have seen their interest rate go from 1% to 3%. If they have a mortgage with a balance of €200,000, they will pay an additional €4,000 per year in interest.

And the ECB says it will continue to raise mortgage rates until they get inflation under control. So what should a borrower do with a tracker mortgage?

If they fix their mortgage rate now, they will lose their tracker when the fixed rate goes up. There’s a general feeling there that “you should never give up on your tracker”. But that’s not always correct. As a rule of thumb, if you have a cheap tracker – less than 1% margin on the ECB – and you have more than 10 years left on your loan, you should probably keep your tracker.

But if you have an ECB plus 2% tracker, then it’s worth very little and you should probably lock in the rate for 5 years. Even if you have a tracker with a very low margin but you have less than 10 years left, you should probably fix it for five years. Once the fixed rate is increased, you may well be paying a higher rate than you would otherwise have paid, but it will be on a much smaller balance and it will be for the very short time remaining on your mortgage.

And what should someone with a variable rate mortgage do?

A client with a variable rate today should repair immediately. They shouldn’t delay or procrastinate as fixed rates are likely to rise in the near term.

— Brendan Burgess

It’s a much clearer decision. The Irish mortgage market has been dysfunctional for many years. While fixed rates in Ireland have been much higher than they have been in the rest of the Eurozone, variable rates have been and continue to be even higher for most banks. A floating rate customer with a loan to value ratio below 80% pays 2.95% to AIB, 3.85% to Permanent TSB and 4.2% to Bank of Ireland. The five-year fixed rate for the three lenders is around 3%.

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A client with a variable rate today should repair immediately. They should not delay or procrastinate as fixed rates are likely to rise in the near term. In most cases, they’ll get a reduction on the rate they pay, and in all cases, they’ll get increase protection for the next five years.

Consider a client of the Bank of Ireland who benefits from a floating rate of 4.2%. If they do nothing, they could well face an increase in this rate. But they could reduce this rate today to 3% by fixing it for five years. For someone with a €200,000 mortgage, that means savings of €2,400 a year in interest and protection against further increases for the next five years.

Spare a thought for the former clients of the main banks whose mortgages were sold to vulture funds because they were late in payment or because they had been restructured

— Brendan Burgess

Even customers currently on a flat rate should review their options. They don’t have to wait for the scheduled end of the fixed rate period. They can break out early and re-fix at current rates. They might face a prepayment charge for breaking their fixed rate early, but it should be very low.

But spare a thought for the former clients of the main banks whose mortgages were transferred to vulture funds because they were late in payment or because they had been restructured. The Central Bank of Ireland and Finance Minister Paschal Donohoe reassured those customers that their terms and conditions would not be affected by the sale. And in the strict sense of the law, that is correct. But the terms and conditions allow the lender to charge whatever interest rate they want. And some of the vulture fund clients were recently told that their floating rates had risen to 4.9%. Others reported being told of an increase to 5.45%.

And when they inquire about fixing their rate, they are told that their lenders do not offer the option of fixed rates. If their mortgages hadn’t been sold, they could have fixed at 3%. Most of these customers have poor credit records and therefore cannot switch lenders. Rate increases will only exacerbate the problem of arrears and prevent them from getting back on track.

The Central Bank forced lenders to sell their so-called bad debts. You might well wonder why neither they nor the government took action to protect these mortgage holders from arbitrary increases in mortgage rates. The vultures have really come home to roost.

  • Brendan Burgess is a consumer advocate and founder of Consumer Forum Askaboutmoney.com

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