If homeowners find that keeping up with their monthly mortgage repayments is a bit of a stretch, then the suggestion that the recent slide in interest rates has halted and that the trend could actually start reversing won't be too welcome. Laura Slattery reports.
The governing council of the European Central Bank meets today, and while they are expected to leave interest rates alone for the moment, a rise in the near future seems likely.
It is a possibility that mortgage holders must be prepared for and lenders claim they are. Banks and building societies "stress test" the ability of first-time buyers to repay their mortgage by working out what their repayments would be if interest rates were to rise by 2 to 3 per cent and if they could afford to repay at those rates.
But lenders' assessment of what homeowners can or cannot afford may not always tally with homeowners' own calculations, particularly if they find their budget is being pulled in a variety of new directions since they last recited a list of their monthly outgoings to their lender.
One way to avoid all this uncertainty is to shun variable mortgage rates and opt for fixed rates.
The Housing Statistics Bulletin for the second quarter of 2003 showed that 51.9 per cent of loans approved for the period were fixed-rate mortgages, jumping from 39.7 per cent in the first quarter.
On this evidence, it looks like the overall percentage of approvals that were fixed-rate loans in 2003 could exceed 2002's percentage of 40.6 per cent. This was a relatively low figure compared to previous years.
After the banks and building societies passed on the last rate cut by the ECB to its variable-rate mortgage holders in June, mortgage broker Simply Mortgages said that the argument for fixing their mortgage interest rates was "compelling".
July 2003, it seems, was the optimum time for people to lock in the benefits of the current low interest rate environment and remove any threat of rising rates.
At the time, three-year fixed rates were as low as 3.79 per cent, while two-year fixes could be found for 2.98 per cent. But fixed rates increased across the board in August in a clear sign that lenders expect the ECB's key rate to rise. The most competitive standard variable rate outside the ECB tracker mortgage market is 3.3 per cent at AIB.
"Three-year rates are around 4.25 per cent - with the exception of First Active at 3.89 per cent - which means variable rates will have to rise by around 1 per cent for borrowers to 'win'," explains Ms Sarah Wellband, mortgage adviser at intermediary REA.
Lenders set their margins on fixed rates in anticipation of what the ECB will do next. As such, in trying to "beat the cycle" and get better value out of fixed than variable rates, homeowners are effectively using their best guesses on the future of the European economy to challenge the view of the lenders.
This can be a tricky game to play. Nearly everybody will know of somebody with the horror story of fixing at what seemed like a competitive rate only to end up paying substantially over the odds over three or five years - or even longer.
But for people on a tight budget the security of a fixed rate will seem attractive, while first-time buyers will want to take advantage of the first-year discount fixes lenders offer.
"If borrowers feel they would be in difficulty should rates rise to, say 5 per cent, then, yes, they should consider locking in for perhaps two or three years for peace of mind," says Ms Wellband. "In most cases I wouldn't recommend fixing for longer than three years," she adds.
Circumstances change: joint-buying couples may split up, and first-time buyers eventually want to become second-time buyers and trade up. If people fix for too long, they may have no option but to pay the sharp penalties lenders charge for breaking out of a fixed-rate mortgage early.
