This December my wife and I will be five years into a €230,000, 30-year mortgage with Bank of Ireland. Currently, we are 11 months into a two-year fixed period, at a rate of 2.9 per cent. Our monthly repayments are €959, excluding mortgage protection, etc.
Since buying the house, the loan-to-value rate has changed from approximately 68 per cent to 45 per cent. We were second-time buyers. I am in my early 40s, my wife is in her late 30s and we both have permanent full-time jobs.
As it seems interest rates are likely to increase over the next few years, if we were to contact the bank before the end of the two-year fixed period, is it possible to negotiate a longer fixed term at their current rates? Is the improved loan-to-value rate of any benefit to us in the regard?
If not, how long before the end of the two-year fixed period do we need to contact a broker, with a view to possibly switching mortgage provider?
Mr JG
The timing of the recent rise in interest rates has been unfortunate for those who have found themselves locked into a fixed-interest rate. The nature of fixed rates is that the bank will generally charge a break fee to end such an arrangement early. Some exceptions have been made recently – notably by KBC in relation to those who have approached them seeking to break fixed rates ahead of the transfer of the bulk of its mortgage business to Bank of Ireland.
With fixed rates accounting for the lion’s share of new arrangements in recent years, it is a problem that many homeowners have found themselves in. Clearly, it’s not an immediate issue as those homeowners will be paying on the basis of the very attractive rates they locked into. And many of those who signed up to such rates in recent times may well see out the current volatility as the European Central Bank and others look to wrestle with sharply rising inflation.
The governor of the French central bank, talking to our economics correspondent in recent days, suggested that inflation might peak in the first half of the year but that it could take two to three years to get the EU inflation rate back down to the targeted 2 per cent. So, if you are on a 10-year fixed rate, things may have calmed down by the time your current fixed-rate arrangement ends.
On a two-year rate, obviously everything is a little more immediate and it seems inevitable that you will be left with some tougher choices.
The choice seems odd. This time last year, inflation was already beginning to rise sharply and most advice I was looking at in the market was to fix for a longer term than one might have heretofore. That was helped by new products from various lenders allowing people in Ireland to lock in mortgage rates for anything up to 30 years. A two-year fix was certainly a strange call.
Break fee
Having said that, there is nothing to stop you asking your bank whether it would be possible to break your current fixed-rate deal to lock in with them for a longer period. I’d be surprised if they didn’t charge a break fee but if you don’t ask, you’ll never know. And asking does not commit you to any particular action.
Bank of Ireland, of course, is one of the banks that has yet to increase its fixed rates. That is unlikely to last but, for as long as it does, it means there is some value to be had.
Even with a break fee, it is worth crunching the numbers either yourself or with an adviser over whether paying the break fee to lock in at a rate that already predates the start of the ECB’s process of rising rates since July makes sense. Rates have jumped two percentage points since then.
AIB has already increased its rates by half a point but more is definitely coming.
If you decide not to activate the break fee and look instead at switching the loan to another provider, you are correct that it will take some time. The word from banks is that it is currently taking about two months to organise a switch once you decide to move. So you would need to have your broker checking maybe three months out. Of course, switching to a different rate in your current bank can be done in an instant.
Loan to value
And if you are seriously looking at switching if you cannot persuade your bank to reach an accommodation on the break fee, there is no harm in telling them so – it might focus minds.
In terms of your improved loan to value, a recent check of rates suggested to me that it would not make any material difference to you. In fact, if anything, counterintuitively, it seems to be working against you.
It is true that the more favourable rates tend to be available to those borrowing under 80 per cent of the value of the property – and even more so under 60 per cent. However, looking briefly at bonkers.ie, it appears that there are better rates on offer for loans of less than 60 per cent of the property value from about 2.6 per cent for a two-year green loan to 2.7 per cent up to five years. If you don’t meet the green criteria, the rate appears to be 3 per cent on anything from three to 10 years.
For loans of between 61 and 80 per cent of the property value, the green rates are about 2.2-2.25 per cent and the ordinary ones about 2.5-2.55 per cent.
That suggests there is not a huge amount of savings for you out there.
