Options when coming off a fixed rate mortgage?

Q&A:Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2. E-mail: dcoyle@ irishtimes.com

Q

My partner and I took out a mortgage of €363,375 in July 2008, and fixed for two years at 5.95 per cent. We now have a number of options to choose from once we come off our fixed rate at the end of this month.

The five options are a tracker variable of ECB + 1.35 per cent, a variable of 3.3 per cent or a two, three or five-year fixed rate of 3.7 per cent, 4.15 per cent or 4.95 per cent respectively.

The mortgage has been a constant source of frustration for the past 18 months as you can imagine, but we are unsure which rate we should go for now. Clearly, the last time we fixed, it didn’t turn out to be the best decision, and we are reluctant to do so this time even though it may be the safer option.

Our lender tells us that we will not be given the option of a tracker again should we decide against it now. Is the tracker a genuinely good decision to go with, or is it a case of feeling we should take it now because our lender says we won’t be offered it again?

- Ms C B, Wicklow

A

I’ve always had an inbuilt bias against fixed rates – working on the assumption that bank actuaries rarely come out the wrong side of such deals – but they do certainly provide security which is a comfort at a time of so much volatility. It is also true that interest rates, when they move again, will be going up. That is often given as a reason for people to fix their rates.

Weighing up the options, you can switch to a tracker (which would currently be 2.35 per cent), take a 3.3 per cent variable or fix from 3.7 per cent upwards.

In relation to the fix, you would be betting that rates will jump more than 1.35 percentage points over the next two years (when compared to the tracker option). Given that rates are unlikely to move at all until next year, you are effectively talking about a rise of somewhere close to two percentage points in 18 months.

It’s not impossible but, if all the talk currently about a slow recovery is accurate, rates are likely to rise only slowly.

On the issue of the variable rate, I see very little merit in it in the circumstances.

Assuming you have 28 years left on the loan, your monthly payment on the variable rate would be around €1,650 (versus around €1,725 on the two-year fix). However, the tracker would currently cost you around €1,470.

Yes, rates will rise, pushing up the tracker but it will also increase the variable rate. What’s more, most lenders are on record as saying they intend to widen the profit margin on variable rates to bolster their troubled finances. They cannot do so on the tracker.

Tracker mortgages are almost unique. In the history of Irish mortgage lending, they represent one of the very few occasions when customers have come out on the right side of the equation with lenders.

My suggestion would be that you strongly consider availing of this option. Your lender has made it clear the tracker option will not be there should in future you now choose one of the other rate options – no surprise as lenders, who are losing money on these rates, are getting away from trackers as speedily as they can.

The alternative would be a fixed rate. As you have discovered in the past two years, there is no guarantee that your choice will be vindicated.

Back in 2008, everyone thought rates would rise sooner than has proved the case.

Of course, if you take the tracker now, there’s nothing to stop you moving to a fixed rate later on if security becomes a primary concern.

This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into.