Moving from a variable to a fixed-rate mortgage will increase the monthly interest bill on a home loan, but the option may offer peace of mind to borrowers concerned about rising rates.
The European Central Bank is expected to increase its base interest rate of 4.25 per cent by either a quarter of 1 per cent or half a percentage point by mid-September in an attempt to cool growth in the euro zone. And certain economists such as Mr Dermot O'Brien at NCB Stockbrokers believe further increases to 5 per cent are likely before the end of the year.
While the lending institutions are certain to pass increasing interest charges on to variable rate borrowers, those with fixed rates will not be liable for the rise.
This comfort comes at a price. "Locking in" to a fixed rate will increase the level of monthly repayments though the extent of the rise will depend on the duration of the fixed period.
At current variable rates, for example, the monthly repayment on a 20-year £100,000 mortgage at the Educational Building Society is £688 with an annual percentage rate (APR) of 5.7. The APR on a three-year fixed mortgage is 5.9 with monthly payments of £722. On a five-year fixed loan the APR is 6.1 with monthly payments of £737.
"At the moment people seem to be playing the variable card," says First Active's head of marketing and e-business, Mr Aidan Magennis. But while fixing a mortgage may be advisable in a climate of rising rates, it depends on the cashflow available to individual borrowers, he adds.
First Active's current variable rate charge carries an APR of 5.78 - the APR on its three-year fixed rate is 6.07 and the fixed charge for five years represents an APR of 6.59.
The ECB rate is on a rising trend. Last November, for example, it stood at 3 per cent.
"The climate is upward in rates. I don't think there's any doubt about that," says Mr Martin Walsh, head of lending at the EBS. "I can't say exactly what will happen, but there is no sign out there that rates are coming down."
If a borrower's income is strong enough to handle fluctuations in interest at the variable rates there may be longterm savings to remain with the variable rates, says Mr Walsh. He added, however, that borrowers with weaker incomes can secure "a certain protection" by choosing to fix their rates.
When asked what AIB was advising borrowers, its spokesman said: "It boils down to customers taking a view of interest rates because there's an element of crystal ball gazing. We do very much leave it to the customer."
He adds "An investor might want to match inflows and outflows while the first-time buyer may want peace of mind."
The current variable APR at AIB is 5.10. The effect of a 0.25 per cent increase in the ECB rate on this would raise monthly repayments rate of £6.58 per £1,000 borrowed to £6.72, AIB's spokesman says. Monthly repayments on a three-year fixed loan are £7.35 per £1,000 borrowed.
Bank of Ireland charges a variable APR of 5.7 on mortgages. Its three-year fixed rate APR is 6 and the equivalent five-year rate is 6.5.
No penalties are charged for borrowers moving from fixed to variable rates. But if the interest rate climate changes and borrowers wish to revert to variable rates from the fixed charge, early redemption fees will apply.
