Difficult choice: fixed @ 4.15 or Variable @ 3.25

hi all,

I'd love and extremely appreciate your expert advise on a choice I have to make.

I am a first time buyer with AIB. Next month expires my 1st year paying the mortgage and last year I opted for the 1 year fixed.

At the moment, the choice the bank gives me is:

- Stay with 3.250 % APR 3.2910 Variable (866 €)
or
- PDH LTV Var <= 50% (3.090 %, APR 3.128 % - 848 €)
- PDH LTV Var > 50% <= 80% (3.290 %, APR 3.3320 % - 871 €)
- PDH LTV Var > 80% (3.490 %, APR 3.536 % - 895.71 €)
- 1 Year Fixed (4.150 %, APR 3.356 %, 978 €)
- 3 Year Fixed (4.880 %, APR 3.632 %, 1073.51 €)
- 5 Year Fixed (5.350 %, APR 4.001 %, 1136.96 €)
- 10 Year Fixed (5.900 %, APR 4.917 %, 1213.15 €)

Property value is about 230k. Mortgage is for 35 years.

Unfortunately I am not really aware of all choices and my background in this is next to nothing. If you were in my shoes, what would you do?

Thanks a lot!

That's a difficult question as it mostly comes down to your mindset, your family circumstances and how much cash you have to pay your mortgage. For example, if you're comfortable with the idea of interest rates rising and you can afford the increases, you should probably stay on the variable. But if you don't like the uncertainty and have responsibilities such as children, and need to know how much you have to pay out every month, then you should fix.

As your mortgage was only taken out a year ago, I'm guessing that you owe more than 80pc of the value. Therefore your variable is 895.71 per month - so if you go for the fixed for one year you'll be paying 987.48 extra over the year. But if we get three interest rate hikes in the very near future, you'll end up paying almost the same on the variable over the year.

If you want some certainty go for the one or three year fixed. In my own personal opinion five years is too long as the market could be completely different by then

aa1 makes valid points. I am not a fan of fixed rates but it does look like rates will be on the rise however fast or slow over the next 18 to 24 mths. I would lean towards the 3 yr just on gut.
You need to be sure you will be staying in the house and not intend selling in the time that you take the fixed term out for otherwise you will have an exit penalty.
Also check what rate you will revert to once the fixed term ends if you go with the fixed rate.

Just be mindful that the average variable rate for the relevant period has to exceed the fixed rate before you're "in the money".

People often make that mistake.

The odd thing here is that AIB's SVR is well below the market rate - 3.5% vs. 5.25% for example with PTSB. I would expect that AIB will push up the SVR beyond the increases in ECB rates.

I don't usually like fixed rates, but these figures seem like good value to me and are worth serious consideration.

Given that some institutions are already charging 5.25% SVR, a fixed rate of 5.9% for 10 seems like good value. The problem with fixing for this length is that you will face a serious penalty if you want to pay off your mortgage early because you have higher income or because you want to move.

On balance, I would fix half the mortgage for 5 years.

Brendan

Thanks a lot guys, you have been incredibly helpful.

I have also a very basic question, I hope it's not stupid.

If I go for the 10 years fixed, I would pay about 14.5k a year and 12.5 in interest (5.9). This means the mortgage will pay off about 2k the first year.

But, if I keep the variable, I would pay off 3.385k (10.4k-7k on 3.29% interest).

Also, I would save about 4.1k that I can put on the mortgage to decrease the payable amount. This would mean that, if I keep the variable option, but save monthly the difference with the 10 years fixed, I'm going to pay off the mortgage much quicker.

Now, does this all make sense or am I losing some big part of it?

Thanks a lot for your help again, this is going to be priceless in our financial planning!

Hi Billy

You will have to do a bit of work to understand this. Start by reading my guide to mortgage calculations.

Brendan

10 years is a long time to fix for. One never knows what is going to happen in life. You often see people fixing for 3 or 5 years really intending to still be in the house but circumstances change and the need/want to move, marriage/job change/inheritance and the likes. The longer you will have left on a fixed term the bigger the penalty to exit it too.