HALF a percentage point interest rate increase hardly represents a financial catastrophe - but it does remind homeowners and borrowers who may have become accustomed to record breaking low rates that what goes down, inevitably comes up again.
As the table below right, shows, the cost of borrowing £50,000 at 7 per cent is about £15 a month cheaper than borrowing at 7.5 per cent. Once the rate starts creeping up to 8-8.5 per cent the £50,000 loan that seemed quite cheap six months ago is beginning to look quite dear, and it doesn't even include the cost of mortgage protection or building and contents insurance.
The chances of interest rates going back up to the frightening highs reached during the currency crisis in 1992 are unlikely - at least not in the short term. Inflation here is stubbornly low and the economy is relatively strong. The only danger looming is the 1999 deadline for the setting up of the common European currency; it is anyone's guess how the currency dealers or the stock markets will react.
A little uncertainty tends to result in overreaction by lenders and the very suggestion nearly a month ago that borrowing rates would have to go up had the instant effect of banks and building societies withdrawing some of their very low, short term fixed rate offers. These one and two year deals are mainly aimed at new borrowers as a ploy to increase market share and don't really reflect the true cost of the money being lent. It is the longer term fixed rate deals that borrowers need to watch to get a proper feel for the way interest rates are going and so far, there is very little sign that the lenders believe rates are on their way up more than a half point. If they did, these long term rates would also be raised, or would be withdrawn altogether.
If you are about to buy a house, you should make sure from the outset that the asking price is within your budget. Start by shopping around carefully for the best lending package; you can do this by using the mortgage interest rate charts provided by the newspapers or by using a mortgage broker, ideally one who is a member of the Irish Mortgage Brokers' Association. They will search out the best rate and deal for your circumstances, but keep in mind that they are paid a fee by the lender for bringing them your business and will take a commission on any insurance products they sell you. No competent, reliable, broker will try to sell you an endowment mortgage.
Whichever route you choose, ignore the nominal interest rate being promoted by the lender (this is the prominently advertised rate) and look instead for the Annual Percentage Rate (APR), which reflects not just the cost of the money over the term of the contract but any fees as well. The APR will often be three quarters of a per cent higher than the nominal interest rate.
Next you should check the cost per £1,000 borrowed so that you can quickly calculate the monthly cash repayment. Don't forget that you need to add the cost of various insurances to that amount. Home and contents insurance depends on the value of the property while the cost of mortgage protection depends on your age (and that of your spouse), the value of the mortgage and whether you are buying it on a level or decreasing value basis (i.e. the insurance cover decreases in line with amount of capital owed.) If you are typically borrowing £40-£50,000, you should count on a monthly insurance bill of at least another £40-£50,000.
Interest rates may still be at a historic low in comparison to what we were all paying a few years ago (the 30 year average to the early 1990s was 11 per cent), but the long term nature of mortgage contracts means that the cycle could very well turn. The volatility of international financial markets means that borrowers need to keep in mind that interest rates could go through another uncertain period. Before you buy your mortgage you need to be certain that if you had to, you could afford to pay 11 per cent interest for a year on a £50,000 mortgage. (This represents a monthly differential of £114.30 on a 7.5 per cent mortgage payment. Over 12 months it amounts to nearly £1,400.00.)
Perhaps the biggest difference between the borrowing situation now and the early 1990s is that the average mortgage then was about £30,000 while today it is closer to £50,000. Incomes have not increased proportionately, nor has job safety. The boom in property prices spells good news for people who bought their homes when values were low and are now enjoying a low interest rate environment; but for anyone setting out to buy their first home, it could result in an extension of resources that could be stretched to breaking point with any kind of significant rise in interest rates.
The Consumer Association of Ireland (CAI), which is preparing a major study on mortgages, has recently advised that even where a fixed rate mortgage would be in your interest - i.e. the lender expects the rate to go up, etc., borrowers should knot expect your lender to pro actively manage your mortgage by approaching you with advice. Lenders are focused on new sales and not on past sales. Beware of differential pricing against you. Double check, for example with another branch that the fixed rates offered to you are not higher than those on offer to new customers."
Finally the CAI points out that "at a time of low inflation and falling tax relief, the real cost of borrowing is quite high. Consequently, accelerated capital repayment makes a lot of sense. This is where you increase your monthly repayments or pay ad hoc lump sums. However, remember that fixed rate mortgages beyond one year have redemption penalties. Discuss this fully with your lender before fixing your rate. You should also explore the possibility of fixing part of your interest rate and leaving the rest variable. This will allow you to attack the variable part with accelerated capital repayments
