Q My fixed rate is up next month and I’ve been told that I don’t need to do anything as interest rates are to start falling and I’ll get the benefit anyway. Is this correct? If not, what should I do to ensure I get the best rate available?
A There are tens of thousands of fixed-rate mortgage holders who will see their fixed rate mature this year. Since this group fixed their loan rate, interest rates have risen significantly, and most should seek advice now to plan your next step before taking the rate offered by their current provider.
While it is thought that European Central Bank (ECB) will begin to reduce in June, we still might not see any reduction in lenders rates until much later. When the decline does start, it will be slow, and so, too, will be the knock-on effect on rates offered to mortgage holders, if there is any impact at all. On top of this, rates are not currently expected to fall back to zero as they once were, but rather the ECB base rate will end up in the 2.5 to 3 per cent range with the banks margin on top of that.
This could culminate in a large tranche of mortgage holders facing higher and possibly unaffordable mortgage repayments. The theory that mortgage lenders will follow any eventual ECB rate reduction and reduce their rates is highly questionable. Firstly, while the ECB has increased rates significantly not all Lenders passed the full extent of these increases on to mortgage holders (trackers being an exception). On this basis, there would be no logic in them reducing their rates in line with any ECB cuts.
Secondly, pressure is mounting on banks to increase rates for deposit holders, and this is set to intensify until action is taken.
Anyone coming off a fixed-rate mortgage agreement needs to be primed to bear the brunt of an increase in their monthly repayment. Not only must homeowners’ budget for this increase, but should they wish to switch to another provider, they will also have to ensure that they pass the lenders’ stress test at the prevailing higher rates. Unlike those purchasing a new home, existing mortgage holders will not have the same established financial budgeting practices. Many will not have been saving consistently and could have other loans – all of which may negatively impact their ability to pass stress tests. Those who cannot meet these tests will find themselves bound to their current lender – even if they do not offer them the best value in terms of interest rates.
No mortgage holder should have to become a mortgage prisoner of their lender. So, if you’re coming off your fixed rate you need to act now so you can put yourself in a position to switch, should there be better terms available elsewhere.
In the first instance, they should contact their existing lender to confirm when their existing fixed rate will expire and understand, based on today’s rates, what their new repayment is likely to be. They should also confirm whether there would be any penalty for breaking the fixed rate agreement.
The next step is to seek advice from a market-based mortgage broker who will confirm the likely new stressed repayments to be met in the future and advise on rates available in the market. Those with a property with a BER rating of A1-B3 can avail of four-year fixed rates starting at 3.45 per cent. There are other offers available if you don’t have a “Green House”. It is possible to get a cheaper rate based on the loan-to-value of your property too for example.