Implication of fixed term roll-off/default rates?

Discussion in 'The Fair Mortgage Rates Campaign' started by Zenith63, 26 Sep 2018.

  1. Zenith63

    Zenith63 Frequent Poster

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    In all the Best Buy Key Posts about mortgage fixed rates, the "after fixed term"/"default"/roll-off rate is often called out quite prominently. Ulster Bank's rates in particular stand-out because their fixed-term rate is the cheapest, while their roll-off rate is nearly the highest.

    I feel the main reasons we don't see many switchers here are having to involve a solicitor again and lack of understanding around the offers. On the latter it's stuff like how much do I save by switching when taking into account the break-fee, how much will a solicitor charge, what are the pre-requisites (valuation required), when can I break, cut-off days in the month for taking fixed terms, how to value up-front savings (cashback) vs. future savings (lower interest rate) etc. The roll-off rates also have my spider senses tingling that I'm missing something with the likes of the Ulster Bank low fixed rate but high roll-off rate.

    So my question is what are the implications of the roll-off rates? Is it simply that if you get to the end of the fixed-term and forget to fix/switch again that you'll be paying a high rate? Or is there a risk that you end up locked into that lending institute somehow, perhaps a property crash brings your LTV over 100% and nobody else will take you and you're existing provider will not give you another fixed term.


    Cheers!
     
  2. gnf_ireland

    gnf_ireland Frequent Poster

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    I really don't think many people think about it. I think the vast majority of new mortgages is more about can I borrow as much as I need to buy the house. For those switching, most are doing so onto fixed term rates and therefore anyone doing so is looking at how much I can save now. The solicitors fees are normally covered for the initial switch.
    Most banks will allow customers coming off fixed term products move onto the currently available products - whether fixed or variable, and therefore I doubt people are giving it too much thought

    Yes, but you are sent communication stating you are coming to a the end of the fixed term rate and therefore you have time to act on it if you are that way inclined. Even if you don't switch, you should select the best rate available for you at that time

    Yes this is a risk, and yes people have been caught on this in the last crash. I would doubt it is a major factor for people unless they have been personally burned.

    If you switch for 3-5 years, who knows what the market will be like then
    If you are switching for 1-2 years, you just need to make sure there is something in the terms that offer you the same deals as new customers on expiry of the fixed term (irrelevant of what the default rate is)
     
    Zenith63 likes this.
  3. Brendan Burgess

    Brendan Burgess Founder

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    Hi Zenith

    Good question.

    In theory, for well motivated, well informed subscribers to Askaboutmoney, the roll off rates don't matter.

    As a result of our campaign, all lenders other than AIB and ptsb, now allow existing users to avail of the best rates on offer to new customers.

    But we know that in practice, most people won't bother asking their existing lender for a better rate, never mind switching to a new lender.

    So does this affect which lender you go for? The "inertia" option would probably be AIB as it's had a comparatively low variable rate for some time now. You might take out an AIB mortgage and forget about it.

    Or go for a BoI 5 year fixed rate and then just make sure to apply for the best rate in 5 years.

    Moving just because the cash-back is attractive or the rate is low for just the first year is probably dangerous.

    Brendan
     
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  4. gnf_ireland

    gnf_ireland Frequent Poster

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    If you look at the UK model, attractive initial rates are common place followed by high follow-on rates. It pays people to actively manage their finances

    Similarly, if you don't manage your utilities and switch each year, chances are you are paying over the odds. However, if you do manage them you are likely to always be on the best available deal. If you don't want to manage each year and save say 15%, Electric Ireland offer a perpetual discount of around 7.5% (odd) that may be more attractive for some. Mortgages are similar, just at a much larger scale.

    For the very reason of apathy (and the banks track record in dealing with customers), I would genuinely love to see Ireland move towards longer term fixed rates as standard, with 10 years plus being the norm. These would need to be fairly priced obviously, and support a defined break-out mechanism (ideally fully standardised across all banks). This model should ideally support a mechanism of over-payment up to an agreed cap.
     
    Coldwarrior likes this.
  5. Zenith63

    Zenith63 Frequent Poster

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    Thanks guys, very helpful!

    One other reason for not being able to switch at some point down the road that crossed my mind yesterday is if you have a mortgage on your PPR, then move out of there and rent it out. You can move to another fixed rate with the same provider easily enough, but if switching provider you're most likely going to need to disclose that the properly is now BTL and you'll be offered much higher rates.