Q&A

Should I take a gamble on a fixed-rate mortgage?

Q

I’m building a new house. It’s decision time now with regard

to what type of mortgage to choose. I plan on starting in the next few weeks.

I can go for a variable rate of 2.79 per cent or I can fix it for three years at 3.65 per cent. My understanding is that the banks will raise their interest rates again by the end of the year.

Should I take a gamble on interest rates rising by more than 1 per cent in the next year or two and thus fix my mortgage? Or should I go for the variable rate?

- Mr E N, Clare

A

You use the word gamble and it is fairly appropriate. A couple of things are reasonably certain. First, and most importantly, lenders will raise rates and they will not wait for the European Central Bank (ECB) to justify doing so. Indeed, EBS has recently announced its second rise in interest rates this year on variable loans – a cumulative rise of 1.2 percentage points.

The other banks, which have also moved once this year, have signalled they will do so again shortly – most likely by between 0.5 and 0.6 of a percentage point – and there is a real chance they might do so yet again before the year is out.

Despite my general bias against fixed rates, such a move in variable rates would more than eat up the 0.86 of a percentage point gap between the variable you are being offered and the fixed rate – and that is before the ECB itself increases rates, probably in the first quarter of next year, a move that would be passed on by local lenders.

Under the circumstances, the

fixed-rate option merits close examination.

Is capital gains tax charged on property in Spain?

Q

We bought a property in Spain in the 1990s and paid for it in Spanish pesetas. I have now sold it and have been paid in euro. For the purpose of calculating capital gains tax, if any, could you please tell me what the euro equivalent is of, say, one million pesetas.

- Mr J N, Dublin

A

Spain levies capital gains tax on the sale of property by non-resident individuals. My understanding is that the rate of capital gains is 35 per cent, although there is relief against this to allow for inflation.

The indexation might be complicated in your case by the fact that the property was acquired in the 1990s. Between 1986 and 1998, one system applied, which allowed for annual indexation of about 11 per cent. After 1998, a different regime tied indexation more closely to the consumer price index.

In any case, I understand the Spanish authorities retain 5 per cent of the sale proceeds “on account”, pending settlement of any outstanding capital gains liability.

The precise details should be checked with your financial representative in Spain.

As to the conversion rate, at the time the euro was introduced, €1 was worth 166.386 pesetas. On that basis, one million old Spanish pesetas converts to €6,010.12.

There is a taxation agreement between Ireland and Spain, so you should not face double taxation on any profits from the sale of this property.

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

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