There are an estimated 100,000 fixed-rate mortgage holders who will see their fixed rate mature in the next 12 months or so.
Since this group fixed their loan rate, interest rates have risen significantly. While it is thought that European Central Bank (ECB) increases will peak soon, we still might not see any reduction in rates until late 2024 or early 2025.
When the decline does start, it will be slow, and so, too, will be the knock-on effect on retail rates offered to mortgage holders, if there is any impact at all. On top of this, rates are not currently expected to fall back to zero as they were just over 12 months ago but rather the ECB base rate will end up in the 2.5 to 3 per cent range.
This could culminate in a large tranche of mortgage holders facing higher and possibly unaffordable mortgage repayments – with a certain percentage simply unable to meet them. An increase in arrears is a highly likely outcome if action is not taken now to inform mortgage holders of the situation that awaits them, and of what action they could take in advance to prepare and perhaps insulate themselves.
Rather than reduce rates in the short to medium term, it would not be a surprise if Irish mortgage lenders increased their mortgage rates at least one more time in 2023
The theory that Irish mortgage lenders will follow any eventual ECB rate reduction and reduce their rates is highly questionable. Firstly, while the ECB has increased rates by 4.25 per cent since July 2022, with a possible further increase due in September, Irish mortgage lenders have not passed the full extent of these increases on to mortgage holders (trackers being an exception), with most having increased their rates by just over 2 percentage points on average. On this basis, there would be no logic in them reducing their rates in line with any ECB cuts.
Secondly, pressure is already mounting on banks to increase rates for deposit holders, and this is set to intensify until action is taken.
Rather than reduce rates in the short to medium term, it would not be a surprise if Irish mortgage lenders increased their mortgage rates at least one more time in 2023.
Stress tests
With this in mind, anyone coming off a fixed-rate mortgage agreement in the next 12 months or so needs to be primed to bear the brunt of an increase in their monthly repayment.
Not only must homeowners budget for this increase, but should they wish to switch to another provider, they will also have to ensure that they pass the lenders’ stress test at the prevailing higher rates. Unlike those purchasing a new home, existing mortgage holders will not have the same established financial budgeting practices. Many will not have been saving consistently and could have other loans – all of which may impact negatively their ability to pass stress tests.
For example, a couple who borrowed €300,000 over 30 years at 2.5 per cent three years ago would currently be paying €1,185 per month. However, based on the interest rates that would be offered by a lender if they were to look for a new rate today, the monthly repayment capacity they would need to demonstrate to pass a lender’s stress test is between €1,402 and €1,620 depending on the lender. Those who cannot meet these tests will find themselves bound to their current lender – even if they do not offer them the best value in terms of interest rates.
No mortgage holder should have to become a mortgage prisoner of their lender. So, the 100,000 mortgage holders coming off their fixed rate in the next year need to act now so they can put themselves in a position to switch, should there be better terms available elsewhere.
In the first instance, they should contact their existing lender to confirm when their existing fixed rate will expire and understand, based on today’s rates, what their new repayment is likely to be.
Given the potential for more interest rate increases, and the tens of thousands of fixed-rate maturities due in coming years, it is vital that existing mortgage holders prepare themselves
They should also confirm whether there would be any penalty for breaking the fixed rate agreement. In the current environment of increasing interest rates, there should not be a penalty in the majority of relevant fixed rate maturities. Armed with this information, advice should be sought from a market-based mortgage broker who will not only confirm the likely new stressed repayments to be met in the future (which will enable prudent financial planning); they will also advise whether current terms available in the market make an early switch an option. If there is no penalty to switch, there are still some excellent terms available to many borrowers in light of potential future interest rate increases.
For example, those with a property with a BER of A1-B3 can avail of four-year fixed rates starting at 3.65 per cent and it is possible for some – based on their loan-to-value ratio – to fix for seven or 10 years or for the life of their mortgage from 3.95 per cent.
Credit report
In terms of those who had their loans sold by their original lender to a fund, they should contact a mortgage broker in order to understand the options that may be available to them.
[ Potential mortgage saving of €6,000 per year by switching, data suggestsOpens in new window ]
Before doing so, they need to be satisfied that they are not in arrears and have not been for at least the previous two years, as any new lender is highly unlikely to facilitate a switch if they have been. In order to confirm this, it might be best for them to request a credit report from the Central Credit Register (www.centralcreditregister.ie), which they can share with their broker.
Given the potential for more interest rate increases, and the tens of thousands of fixed-rate maturities due in coming years, it is vital that existing mortgage holders prepare themselves to ensure they can secure the best mortgage terms available to them. It is incumbent on all relevant industry stakeholders to call out this message to heighten awareness. We don’t need any more mortgage prisoners.
Trevor Grant is chairman of the Association of Irish Mortgage Advisors.
