Avant launches new mortgage fixed for 30 years at 2.85% to 3.1%

NoRegretsCoyote

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It is a one way bet.
Not for sure. You can get 1.5% for thirty years in somewhere like the Netherlands where it's easy to reposess a house.

Ireland may get there too. Who knows, 30 years is a long time. No one could have pictured 2021 from 1991.
 

Brendan Burgess

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3% fixed for 30 years is a great opportunity.

Here are some reasons why fixing for 30 years is probably not right.

1) Irish rates are much higher than in the rest of the eurozone. Competition or a change in our policies towards repossessions may bring them lower.

2) A person on 90% LTV who fixes for 30 years pays 3.1% .
A 3 or 4 year fix 90% LTV is 2.35%
A 7 year fix of 60% LTV is 1.95%

Someone borrowing at 90% LTV should fix for 4 years at 2.35%.
They will save 3% over the next 4 years.
They should use these "savings" to pay down their capital.

Let's say that they start with a property worth €100k and they borrow €90k
They pay the savings off their loan.
They will be down to about €78k after 4 years.
So they are now at 80% LTV

If house prices rise or if they pay off some more capital, they could well find themselves coming close to 60% LTV and thus qualifying for a much cheaper mortgage.


3) Most people clear their mortgages in about 20 years, so it just doesn't seem right to pay a fixed price for a product you may no longer need in 20 years. Granted the early repayment penalty will be only 1.5%.

4) A 30 year mortgage will halve after 18 years with ordinary repayments.

So even if mortgage rates do rise dramatically, the borrower will have a much smaller mortgage.

5) When mortgage rates were very high, so was salary inflation. And it's very likely that if we do have much higher mortgage rates, there will be corresponding inflation.
 
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cremeegg

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Not for sure. You can get 1.5% for thirty years in somewhere like the Netherlands where it's easy to reposess a house.

Ireland may get there too. Who knows, 30 years is a long time. No one could have pictured 2021 from 1991.
You are missing the point.

It may well be that Ireland will have mortgage rates averaging 1.5% over the next 30 years. In which case a borrower wold lose out the the extent of 1.5%, that is about the 'worst' that could happen and the borrower will still have certainty which is worth something.

We might have average rates of 4.5% in which the borrower would be better off by 1.5%.

We might have average rates of 6% or any higher number. That is the point, these loans offer protection against higher rates for little, not zero, cost.
 

Brendan Burgess

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Hi cremeegg

You are missing the point that the mortgage balance will decline over the 30 years.

So getting a cheaper rate in the earlier days is very important.

You are also missing the point that competition may allow you get a cheaper fixed rate for 30 years in the coming months.

You are also missing the point that many, many questions on askaboutmoney are from people who fixed based on arguments like yours who subsequently regretted it.

Brendan
 

Leper

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My tuppence worth . . . . having worked my butt off through several mortgages the biggest fear I ever had was the unknown i.e. not knowing what the mortgage interest rate would be the next week never mind next year.

The quicker we get round the way the Dutch think, the better. Better again let's think the way the Swiss do and have a 100 year mortgage.
 

cremeegg

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Brendan,

You are over complicating the maths.

If you borrow €100,000 over 30 years your average outstanding balance is approx €66,000.

The difference between 3% and say 1.5% of €65,000 is €975 p.a.

The difference between 3% and 6% of €65,000 is €1,950, and it might run at much more than 6%.

I accept that other better 30 year fixed rate offers may come along soon. My point was not that this particular offer is the best, but that 30 year fixed rates at these very low rates (by historical standards if not by some European standards) are a brilliant product.

As for people regretting fixed rates, well I have posted on here in the past that Fixed Rates are a bad idea, unless you really need the certainty because the bank charges extra for giving you that certainty. That in effect getting a FR is betting the you know more than the bank about the course of future rates.

But this is different (spot the opportunity for a cheap shot, I know you wouldn't stoop Brendan) in 2 ways: 30 years rates have never been available in ireland in the past, and rates of 3% have more risk on the upside than on the downside.
 

NoRegretsCoyote

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You are missing the point.
I'm not missing the point. The risk is not symmetric, but there is indeed a risk that you could be "stranded" on what turns out to be a high rate if market rates fall even further.

It could impair your chances of, say, trading up in future.

As I said, I would personally fix some, but not all, of a mortgage for the full term if I was taking one out.
 

Brendan Burgess

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You are over complicating the maths.

If you borrow €100,000 over 30 years your average outstanding balance is approx €66,000.

With respect, you are oversimplifying it.

The average balance is not relevant.

You have the highest balance now, so you get more benefit from a cheaper rate now.

After 20 years, the rate will probably be higher, but the balance will be a lot lower.

The vast majority of people will have their mortgage well cleared in 20 years. I would prefer to save 3% of €100k now, than save 10% of a nil balance after 20 years.

A lot of this has to do with the principle of flexibility.

Many people enter into long term contracts when they shouldn't.

A 4 year fix for someone who is going to reduce their LTV seems about right.

A 7 year fix for someone already on 60% LTV seems about right.

Having said that, I probably would wait a few weeks to see if the other lenders respond to Avant's moves.

Brendan
 

Brendan Burgess

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Hi cremeegg

I am probably not explaining it very well, so let me ask you a very specific question.

Your 30 year old friend asks you for advice.

He is taking out a 30 year mortgage with Avant at 90% LTV.

They have insisted that he choose one or other of these two products. This is the only choice he has.

30 years fixed at 3.1%

20 years fixed at 2.75%

Which would you recommend?

Brendan
 

Gordon Gekko

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The salient point is that rates in Ireland are artifically high.

Rates in Europe are substantially lower.

I wouldn’t dream of fixing for 30 years at 3%.

I believe that the direction of travel will be for Irish rates to more closely align with European rates.

My own plan is to avail of the 1.95% rate for 7 years and take it from there.
 

NoRegretsCoyote

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I believe that the direction of travel will be for Irish rates to more closely align with European rates.
You are right. Mortgage delinquency didn't go up in response to Covid, in fact it continued to fall.

Over time this data point will be incorporated in banks' internal models, and the 2008-2012 delinquencies will have less weight.

This will (over time) mean banks having to issue less capital for mortgage lending. Less capital=less cost.
 

letitroll

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You are right. Mortgage delinquency didn't go up in response to Covid, in fact it continued to fall.

Over time this data point will be incorporated in banks' internal models, and the 2008-2012 delinquencies will have less weight.

This will (over time) mean banks having to issue less capital for mortgage lending. Less capital=less cost.
Its somewhat hard to unpack the moving parts of the delta between ourselves and continental Europe but yes the risk weighted asset model which incorporates the Celtic tiger bust will roll off soon & banks might be required to set aside less capital against each loan......think this could shave off up to 0.25% MAX.........but given the retail banking market has shrunk from 5 to 3 players I'd add back that 0.25% in my mind under the lack of price competition heading.............whats not rolling off any time soon is the Loss Given Default (LGD) number in the bank models which I think now is a much bigger proportion of the delta.

Given the housing crisis and spectre of Sinn Fein lurking in the shadows FF/FG will not touch the repossession issue. It will continue to put borrowers ahead of the banks and that will only continue to compound the competition problem. Small players like Avant may come in and cherry pick at the margins certain customers but what would really shake up the game is exactly what's leaving - big European balance sheets with an intention to play at a high street direct to consumer retail level.....I dunno like a Natwest or a KBC :)

In regard to the debate on wether fixing for 30 years is a good move or not. I think I'm hearing two arguments that are both right from their standpoint:

@Brendan Burgess is probabilistically and correctly laying out the fact that in all likelihood you'd be better fixing for a shorter period, overpaying the extended term premium you would have been paying and driving down the LTV ASAP and swinging into lower rates over time. He's right.

@cremeegg is laying out a 30 year trade. Where if your wrong you lose relatively very little vs. the chance of upside. If your right you win ALOT i.e rates are materially higher moving forward closer to 7-8% historical average with inflation running closer to historical trend of 2%+. He's right as a trade it has great risk/reward.
 

NoRegretsCoyote

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think this could shave off up to 0.25% MAX.........but given the retail banking market has shrunk from 5 to 3 players

Well for mortgage lending there is Avant Money now.......as is the topic of the thread.
I'd add back that 0.25% in my mind under the lack of price competition heading.............
Avant trying to build market share would tend to rebut that point.

whats not rolling off any time soon is the Loss Given Default (LGD) number in the bank models which I think now is a much bigger proportion of the delta.
Not true. Very little negative equity anymore given Central Bank rules and . There was vast amounts ten years ago. Almost all newly defaulting borrowers have LTVs well <100%.


Anyway the euro area/Ireland mortgage price differential should converge but a rise in wholesale rates could wipe it all out. There are a lot of moving parts. Getting back OT I would think that fixing your entire mortgage for thirty years right now is kind of like picking the third favourite in a horse race. You could have a big smile on your face but it's not the most likely outcome.
 

Brendan Burgess

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whats not rolling off any time soon is the Loss Given Default (LGD) number in the bank models which I think now is a much bigger proportion of the delta.
Not true. Very little negative equity anymore given Central Bank rules and . There was vast amounts ten years ago. Almost all newly defaulting borrowers have LTVs well <100%.

Hi Coyote

Letitroll is correct here.

Although the situation with arrears and negative equity is much better, the old numbers are embedded in the banks' models according to the regulator's rules.

In other words, the banks are setting aside capital based on the less relevant historic losses than on the expected losses.
 

NoRegretsCoyote

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Although the situation with arrears and negative equity is much better, the old numbers are embedded in the banks' models according to the regulator's rules.
Indeed. But banks can't use the old numbers forever. Recent observations will enter into the sample period.

Underwriting standards and borrower behaviour have been dramatically better since about 2012, so over time the parameters used by the banks for their own internal models will improve too.
 

Brendan Burgess

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Hi Coyote

I can't remember the exact rules, but I was shocked at how long the old numbers last in the models. They won't be out of the models for some years yet.
banks can't use the old numbers forever.
It's not a question of "can't" - they must use these old numbers. They have no choice. Banks would not use these numbers if they were allowed not to.

Brendan
 

NoRegretsCoyote

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@Brendan Burgess

It's complicated but banks are required to use "long-term averages"

Suppose LGD was 50% between 2004 and 2012, and 10% between 2013 and 2021. In 2015 they would have had to use an estimated LGD of 50%. In 2022 they will be using 30%. They have to course make "worst-case" estimates too, but as time goes on the lower default rates that you see today make the 2008-2012 period look more "extreme" and less "normal".


Caveat: I have never worked on Irish bank's internal models but I know the theory and the standards. If anyone knows this better up close please feel free to correct me.
 

skrooge

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I know the LGD/risk-weights had been mentioned as an reason contributing to Irish banks charging higher rates but does the same issue not hold for Avant (well bankinter)?

They might not be a bank here but they are owned by a Spanish bank who must hold capital against their activities in the same way.

Are their operations so small they are not required to calculate Irish mortgages differently. In turn is there a limit where bankinter would be required to calculate numbers using historic Irish data. this might point to an upper limit on their involvement.
 
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