Rising rates: Mortgage holders should act now to protect themselves

As the cost of living continues to inch up, it's possible that pressure will mount on the European Central Bank to start to increase interest rates once more. After all, the Bank of England recently signed off on a 25 basis-point increase to bring its rate up to 0.5 per cent.

While Irish mortgage rates are, to a large extent, already decoupled from European base rates, a rising interest rate environment will nonetheless likely start to impact. If a banks' cost of funds rise, it inevitably will be passed onto its customers.

As shown regularly in data from the Central Bank, Ireland has among the highest mortgage rates in the euro zone. With an average rate of 2.69 per cent, it is more than double the euro zone average of 1.29 per cent, and compares very unfavourably with Finland (0.77 per cent) and Portugal (0.82 per cent).

According to figures from Bonkers.ie, this means that someone with a €262,000 mortgage over 30 years is paying almost €180 extra every month, or over €2,100 a year, compared to some of our European neighbours.

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So if rates start to rise, Irish homeowners may feel the pinch more than their European counterparts. According to Trevor Grant, chairman of the Association of Irish Mortgage Advisors (AIMA): "It is most likely not a case of whether interest rates will rise but rather when they will rise, though this may not be until the end of 2022 or early 2023." He notes that markets have already priced in a half a per cent rate rise by year-end.

Given how for most households, the mortgage is their biggest financial expense, it is, he says, time for people to start thinking about the implication of what a rate increase would be, and how best to protect against it.

“There is an important six months ahead for mortgage holders to ensure they’re protecting themselves against any future increases,” he says.

While rates are not yet increasing, switching to a more competitive rate will save you money today – and potentially protect you against any rate increases down the road.

So if you have an outstanding mortgage, or are in the market for a new home in 2022, what do you need to consider?

New home buyers

If you're a new home buyer, shopping around and considering less familiar names such as Avant Money and Finance Ireland – as well as doing your sums on cashbacks – will be key to getting the most competitive deal.

"For younger first-time buyers, it's all about the monthly payment, and can I get cashback," says Grant, noting that older buyers tend to be interested in fixing for the long-term.

For Rachel McGovern, director of financial services at Brokers Ireland, there is also an opportunity for those with energy efficient A- or B-rated homes to save money.

“There are really good rates out there,” she says, pointing to Haven’s recent move. AIB’s broker subsidiary has just cut the rate on its four-year green mortgage to 2 per cent from 2.15 per cent previously. To qualify for a green mortgage, you’ll typically need a home with a BER of between A1 and B3. This means the incentive is largely confined to new homes.

In addition, the most competitive rates are undoubtedly for those willing to fix.

A first-time buyer, for example, buying a home worth €300,000 with a 10 per cent deposit could save themselves almost €400 a month by opting for a more competitive offering, as our table shows.

Variable rate

According to Central Bank data, some €13 billion in outstanding mortgages are on a standard variable rate. And, given that such rates can be as high as 4.5 per cent, there are a lot of homeowners out there who could stand to save a significant sum.

As Grant notes, there is “huge inertia” among some Irish mortgage holders.

“If you haven’t switched in the last few years, you should definitely look at what’s out there. It could save you a lot of money,” adds McGovern, although she adds that rates may yet fall a little further before they start to go up.

“If you’re trying to get the bottom rate, we may not be quite at the bottom yet,” she says. But the bottom is very hard to call, so don’t let it put you off doing anything.

Some variable rate homeowners will be on a variable for specific reasons – perhaps they’re hoping to sell their property in the near term, or are focused on over-paying their mortgage. Others, however, should make switching a priority, as the savings can be significant.

As our table shows, a homeowner with a €250,000 mortgage on a 4.2 per cent variable rate can save a significant €276.72 a month (€3,320.64 a year) by switching to a fixed rate of 2 per cent if they qualify for the “green” status, or about €260 a month if they don’t.

Trackers

If you're lucky enough to be on a tracker rate, you will have been enjoying the benefit of the ultra-low ECB rates of recent years. Most trackers were set at a margin of ECB + a percentage of between about 0.5 of a percentage point and two points.

With ECB rates at zero, this means that some mortgage owners have been paying interest at a rate of about 0.5 per cent (very attractive when you consider rates are currently averaging about 2.69 per cent). But with rates set to move, it’s likely that these tracker products will also start to become more expensive.

How expensive they become – and therefore how sensible it might be to switch – will likely depend on your margin above ECB. For example, should ECB rates rise to 0.25 per cent, the more attractive tracker rates will mean a homeowner will see their rate increase to just 0.75 per cent – still very attractive.

“For some tracker mortgages with low margins, these will remain a golden egg into the future. However, for others on relatively high margins, fixed rates offering security of payment may well be a very attractive option,” says Grant.

If you have a tracker of ECB +2 percentage points, for example, you might be better off checking out what’s available in the fixed-rate market, as one increase may beget another, and that tracker could, over time, surpass other rates available in the market.

Fixed rates

For Grant, “no matter what rate you’re on, unless you’re on a very good, low, long-term fixed rate, you should be looking at what other rates are available to you”.

If your fixed term is coming up, it will cost you nothing to switch – and given the direction of property prices, you might find you are eligible for an even better rate, given your likely fall in loan-to-value (LTV) – how much you owe the bank as a proportion of the value of your home. For example, an outstanding mortgage of €200,000 on a home now worth €320,000 in the market will give an LTV of 62.5 per cent.

"Mortgage interest rates start to get a lot more competitive at [or under] 80 per cent loan-to-value as banks tier their rates based on this calculation," says Martina Hennessy, managing director of doddl.ie. And, given recent price increases, this means that anyone who took out a mortgage in 2019 or 2020 with an original loan-to-value of 90 per cent is likely to be at around 80 per cent now.

Some of the best rates in the market are restricted to those with low LTVs, such as Avant Money’s 1.95 per cent fixed rate (over three to seven years), which is only available to those with an LTV of 60 per cent or less.

If you’re in the middle of a fixed-rate term, you should also consider your options. Grant says you shouldn’t be put off by potential break fees either.

“Go and get the [notice of] fixed-rate penalty and look at the options. Fixed-rate penalties can be very low – and in some cases not much at all,” he advises, “but find out and do the maths.”

He says long-term rates that came on the market over the past year are looking particularly attractive now. You can fix for 15 years with Finance Ireland from 2.4 per cent, for example, or for 20 years with Avant from 2.45 per cent (depending on the LTV).

If you do fix for the long-term, consider first whether or not you might move house in this period, and whether or not you can bring your mortgage with you, which is the case with some lenders.

“If you say, ‘I’m not in my forever home, I’m going to trade up in five years’ time,’ then a 10-year fixed rate may not be the one for you,” says McGovern.

Switch - with your own lender

Remember, you don’t have to switch lender to save money. Your first call should be to your own bank. Ask them could they offer you a better rate. Many lenders now offer discounts for those whose loan-to-value (LTV) have fallen; and thanks to soaring house prices of late, this is where a lot of people who have owned a property for a few years might find themselves.

For example, AIB has a two-year fixed rate of 3.15 per cent for those with a LTV in excess of 80 per cent. Once this falls below 80 per cent, however, it falls to 3.05 per cent,

You will likely need a valuation from an estate agent to transact this move, but it can be worthwhile.