Key Post I can't switch lenders - should I fix?

[Brendan Burgess]

This is a very difficult decision. I have taken two case studies to try to approach the question systematically.

It's not possible to be definitive about this, because of the following uncertainties:

• The behaviour of the banks
  
• The willingness of Minister Noonan to force the banks to charge fair rates
  
• The willingness of the Central Bank to protect consumers
  
• The success of the Fair Mortgage Rates Campaign

These factors should push down variable and fixed rates, but we don't know by how much and when they might come into effect. It might take a change of government and a change of Central Bank Governor to effect these changes.

But against all this, the ECB rate is likely to rise over the coming years.

Summary of my opinion - but read the full thread and make up your own mind.

AIB - the difference between the SVR of 3.9% and the one year fixed rate of 3.5% is not big enough to save a lot or cost a lot. If you are having difficulty meeting your repayments, then fix for one year as it may make the difference between meeting your repayments and going into arrears.

BoI - the difference between the SVR of 4.5% and the two year fixed rate of 3.75% is significant, so it's probably correct to fix. However, if you can afford to, you should hold off fixing until you see if the campaign succeeds in reducing the rates furhter. Holding off will cost you €60 per month per €100,000 borrowed. If you are struggling with your repayments, then you should fix immediately.

KBC - the difference between the SVR of 4.3% and the two year fixed rate of 3.9% would not justify fixing now.

Ulster Bank does not allow customers with LTVs over 80% to fix.

Permanent tsb - doesn't allow existing customers to fix.

 

[Sarenco]

I suppose time will tell whether Brendan's advice proves to be correct.

Personally if I was on a 4.5% SVR rate with BOI and was unable to switch to another provider, I would be sorely tempted to fix for 2 years at 3.6% (or 3.7% for that matter). BOI could certainly reduce rates further but they would have to do so relatively quickly (unless the further cuts are very substantial) for a borrower not to still come out ahead. Equally they could raise rates during the 2 year period...

 

[amd712]

I'm trying to decide whether to change from ESB SVR to 1 year fixed rate(3.5%) SVR is at 3.95%, I know that you said that you wouldn't advise fixing at higher than 3% but realistically do you think there's a good chance that the SVR rate will be reduced again by a significant amount in the coming year? I took out €250k mortgage in 2010 (35year term)....Grateful for any advice as I really don't know what to do! Thanks

 

[Brendan Burgess]

I have copied these from the other thread, as I think it's well worth doing the numbers on these.
It is assumed that the borrower is stuck with their current lender due to negative equity. If switching is an option, the issue is more complex.

For simplicity, assume the mortgage is €100k

Let's take the EBS case first
SVR: 3.9%
Fix for one year: 3.5%

Note: Compare the interest paid and not the repayments made when doing the comparison. The cost of a mortgage is the interest paid on that mortgage. The repayment includes interest and capital, and repayments vary depending on the duration of the mortgage.

To benefit from holding off, there has to be a significant cut very soon, so it's probably correct for an AIB customer to fix now for one year.

As AIB has lowered its APR to 3.9%, the gap between it and the cheapest fixed rate - 3.5%, isn't that great, so you don't gain a lot by fixing or lose a lot by not fixing.

 

[Brendan Burgess]

Now let's look at the Bank of Ireland example

SVR: 4.5%
Fix for one year: not available to existing customers
Fix for two years: 3.75%

If there is no further rate reduction in the coming year or so

It’s unlikely that there will be a significant reduction in Bank of Ireland’s SVR. For this to happen, the government would have to give the Central Bank the power to control rates and then the Central Bank would have to exercise that power. As that combination is unlikely, it can be discounted.

It's more likely that the government will persuade the Bank of Ireland to reduce its fixed rate to a fair level.

So it is correct to fix. The question is whether one should fix now or wait to fix later.

If Bank of Ireland makes no further reductions in its fixed or variable rates, then it costs the borrower €60 per month per €100,000, for every month she waits before fixing.

If the two year fixed rate is reduced to 3% on 1 January – fix then for two years

I think a Bank of Ireland customer should fix, but not yet. I hope that the Minister for Finance is not happy with the rate cuts announced and that he will put pressure on all the banks to reduce rates further. It may then be correct to fix.

 

[Brendan Burgess]

One very good reason for holding off fixing for two years, is that the banks may offer good long term fixed rates.

In other Eurozone countries, borrowers can fix for 10 years at rates of around 2.5%.

If this option were to become available in Ireland, then borrowers would be well advised to avail of them.

If a borrower fixes now for two years, then they will not be able to avail of these rates until the two year fix is up.

By the end of the two years, it's quite likely that ECB rates will have risen and the long term fixed rate will have risen as well.

 

[Brendan Burgess]

You should fix now if you are finding it very difficult to meet your mortgage repayments

You can save €60 a month immediately by fixing your mortgage rate at 3.75%. For many people, this saving will be the difference between meeting their repayment and falling into arrears. Or it may be the money required to bring the child to the doctor. If things are this tight, then it's correct to fix immediately.

 

[Brendan Burgess]

Does the term remaining on the mortgage matter?

In the above examples, I have assumed a mortgage with 20 or so years left to run.


When calculating the interest, I have multiplied €100,000 by 4.5% by 2 years to get €9,000. The actual interest paid will be a little bit less as the borrower is paying down capital every month. But this does not change the outcome as it affects both calculations equally.

Here are the exact figures with 20 years remaining:

But what if there is only 5 years left on mortgage?

I think it's the same conclusion:
I think a Bank of Ireland customer should fix, but not yet. I hope that the Minister for Finance is not happy with the rate cuts announced and that he will put pressure on all the banks to reduce rates further. It may then be correct to fix.

 

[amd712]

Thanks Brendan, appreciate the advice!

 

[Sarenco]

Hi Brendan

Would you still advise somebody who was not in a position to switch mortgage providers not to fix at any rate above 3% to escape a high SVR?

 

[Brendan Burgess]

Have you read the thread????

No one knows for certain, but my gut feeling is that borrowers should not fix for more than one year.

 

[Sarenco]

Have you read the thread????

No one knows for certain, but my gut feeling is that borrowers should not fix for more than one year.

Yes, I've read the thread (you may recall that I contributed to the original discussion).

You recently expressed the opinion that you didn't think anybody should fix at any rate above 3% and I'm simply asking whether you remain of this view. This is a live issue for a large number of borrowers so I don't think it's an unfair question to ask.

 

[Danmo]

Thanks for taking the time to do the case studies. I think a wait and see approach is best for now as you advise.

 

[Brendan Burgess]

Based on feedback from someone facing this decision, I have updated the thread considerably:

I have added a summary to the first post

Summary of my opinion - but read the full thread and make up your own mind.

AIB - the difference between the SVR of 3.9% and the one year fixed rate of 3.5% is not big enough to save a lot or cost a lot. If you are having difficulty meeting your repayments, then fix for one year as it may make the difference between meeting your repayments and going into arrears.

BoI - the difference between the SVR of 4.5% and the two year fixed rate of 3.75% is significant, so it's probably correct to fix. However, if you can afford to, you should hold off fixing until you see if the campaign succeeds in reducing the rates furhter. Holding off will cost you €60 per month per €100,000 borrowed. If you are struggling with your repayments, then you should fix immediately.

KBC - the difference between the SVR of 4.3% and the two year fixed rate of 3.9% would not justify fixing now.

Ulster Bank does not allow customers with LTVs over 80% to fix.

Permanent tsb - doesn't allow existing customers to fix.

I was asked if it mattered whether there were 20 years to go on the mortgage or 5 years to go.

I don't think so, but I would welcome a second opinion on it

http://www.askaboutmoney.com/threads/i-cant-switch-lenders-should-i-fix.194634/#post-1436355

Brendan