UP to three quarters of first time house buyers now fix their mortgages, usually for one or two years. Currently Irish interest rates are at an historic low and with the next move in rates likely to be upwards, now is the time for borrowers to consider a fixed rate option.
There are currently some good offers available on shorter term fixed rate mortgages in particular. However the best deals are available for new borrowers - for example the Irish Permanent offers a one year fixed rate of 5.8 per cent for new borrowers, but 7.25 per cent for existing customers - half a percentage point above the variable rate. Three to five year fixed rates are more expensive. While offering the security of knowing that interest payments are fixed for a considerable length of time, they are well above the current variable rates. With few analysts predicting sharp increases in variable rates over the next year or two, the price of the security of a longer fixed term rate could be high over the first couple of years of the loan. Existing borrowers also need to check whether they face any charge in moving from the fixed to the variable interest rates.
It is important when comparing the APR's on fixed rates to realise that they are calculated using the fixed rate for the period and then the existing variable rate for the remainder of the loan term.
When entering a fixed term contract, it is very important to check the small print to see what penalties the lending agency will enforce, should you have to redeem your policy earlier than expected. The penalty for breaking a fixed rate mortgage could be £5,000 on a £70,000 mortgage. In one case a borrower with a mortgage of £170,000 was faced with a penalty of £18,000.
The penalty for the average housebuyer would be in the range of £3,000 to £4,000. A wise move to avoid penalties may be to fix just a portion of the mortgage.
The penalties for breaking a fixed rate mortgage contract vary greatly from one institution to another. They are calculated by the lender as the monthly interest repayable, multiplied by a certain number of months. The number of months can be as few as three or as many as 18.
New borrowers have never had it so good, and the range of one to two year offers are particularly attractive. The borrower should of course look beyond the initial fixed rate offer to what options are available when this period is over.
The choice for the existing borrower is whether to stick with the current attractive variable rates of about 7 per cent or take one of the fixed rate options. First National is offering a two year fixed rate at 6.75 per cent.
"This is close to the variable rate. With the variable rate unlikely to come down, home buyers can only gain," said Mr Mark Pasquetti, mortgage broker with the Acorn Group.
The average three year fixed rate is about 7.75 per cent. Five year fixed rates look on the pricey side at 8 per cent and more. The lowest ever five year fixed rate mortgage was on offer a few years ago at 8 per cent. It is now possible to fix your rate at very close to this, 8.25 per cent for five years.
For some people, it can make sense to fix their mortgage. Though they pay over the odds at the start, they have the security of knowing their repayments will not change and they can budget with some certainty. Depending on a person's employment position, some home buyers are" prepared to take risks and others are not.
In a rising property market, many people cannot afford their ideal home but they are nonetheless trading up. They purchase "stepping stone" houses, intent on selling them on in a relatively short space of time and taking their profit. Such people need to be careful. They could be in breach of a fixed rate mortgage contract and liable to penalties.
If a home buyer opts for a five year fixed rate mortgage, the lender purchases money at a set price and aims to ensure that its costs are recovered.
The penalty to the house purchaser on breaking the contract is substantial. Alternatively the homebuyer may come into a lump sum and may wish to pay off a chunk of the mortgage. In this case too, a penalty would apply, if rates obtainable are then lower than the fixed interest rate originally agreed.
On the other hand if market rates have by that time risen above the fixed rate being paid, there would be no penalty to the homeowner.
Fixing just a portion of the mortgage would give the borrower more room for manoeuvre, allowing a lump sum to be repaid.
So what is the outlook for variable rates? House prices in the last six months have risen sharply. A slight increase in interest rates may yet be introduced to cool things a little. The five year money rates are a good indicator and a small increase has been factored in. The Central Bank is unlikely to raise rates in the immediate future, according to market analysts. However it continues to be anxious about the growth in consumer credit. Residential mortgage lending helped push credit growth higher again in April. Mortgage lending was 14.8 per cent higher in April compared to a year earlier. With the growth trend in the housing market, the figures are hound to fuel Central Bank concern about the booming house market.
