With interest rates now firmly on the way back up, many are questioning whether to fix their mortgage payment or leave it variable.
There are a number of arguments either way but there is also another more novel solution - repaying capital with the additional premium.
For many borrowers the recent steady rises in interest rates will add to their repayments. News of escalating oil prices, trouble in the Middle East and the weak euro all mean higher interest rates.
At the moment the lowest variable rate for new borrowers is 4.64 per cent from Bank of Ireland. At the same time, after recent rate increases, five-year fixed rates are available at around 6.5 per cent which is almost a 50 per cent increase on current variable rates.
Of course if variable rates were to go above 6.5 per cent over the next five years then it could have proved to be a smart move to fix your rate at the moment. However, most analysts believe that rates will remain below 6 per cent next year and predictions after that are really no more than guesses. The European Central Bank is currently saying that euro zone growth may have peaked, which means interest rates may not be rising in a year's time.
The other problem of course with fixing rates is that substantial penalties are usually involved to get out of a fixed rate loan. On top of that if variable rates do not exceed 6.5 per cent over the next few years you may feel as if you have had a bad deal.
But borrowers who are prepared to pay the high fixed rate could do it in a different way. This involves taking the difference between the current variable rate and current fixed rate on offer and then converting it into a supplementary capital repayment.
In practical terms this would mean paying the higher amount which will repay your capital faster than otherwise. For example, an additional £120 a month amounts to £7,200 over five years on a mortgage of £100,000.
In effect, you are buying your own property more quickly which may also appreciate in value.
However, you should make sure that your lender takes immediate account of increased payments. This is not the case for First Active borrowers who have been there for several years and for all Irish Nationwide borrowers.
If the pessimists then prove correct and interest rates do rise above 6.5 per cent, you can simply stop making the additional repayment, and your repayment should not increase. Instead of making supplementary capital repayments you will be putting the money into increased interest charges.
In other words, one possible choice is to pay a higher rate of interest to guard against a potential rise in variable rates or to stick to your variable rate and pay the fixed rate difference towards the capital of your loan.
OF course for some people paying that extra is worth it simply for peace of mind. If you have very substantial borrowings this is particularly the case. Although in this case you could choose to fix part of your loan and keep the rest on variable, with the additional capital repayment if you wished.
On a £75,000 loan the current gap between the two rates would mean around £3,200 capital being repaid over three years and £5,000 over five years. For a larger loan of £200,000 an additional £8,000 would be paid off after three years and some £14,000 after five years. The main problem with this approach is that if the variable rate were to rise above the 6.5 per cent or other rate you chose, you would have no protection. So while it is extremely unlikely you would have to meet the higher repayments you would have no insurance.
