Brendan Burgess
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I have argued for the last two years that borrowers, who could switch lenders, should not fix their mortgage rate as both variable and fixed rates are too high in Ireland and are expected to fall. I argued that by fixing now, you would be preventing yourself from switching to avail of the lower mortgage rates when they come.
But as Red Onion has pointed out in this thread:Understanding Fixed Rates breakage costs
the cost of breaking out of a fixed rate mortgage is likely to be much lower than people expect, and may well be zero.
So, looking at the Mortgage rate tables for maximum 90% LTV mortgages for example, let's compare the following options:
Fix with Bank of Ireland for 3 years at 3.2% and get 2% cash back.
Go variable with EBS for 3.7% with 2% cash back.
What are the likely scenarios?
1) Variable mortgage rates gradually fall by 1% - fixed rates fall as well, but by 0.5%
Legislative change bans cash back and forces banks to compete on mortgage rates alone.
This could happen toward the end of the year, but let's say it doesn't happen until July 2018
Some other lender brings their variable rate down to 2.7%
If you opt for Bank of Ireland, you will be paying 3.2% instead of 2.7%.
You will be fixed for another 2 years at 3.2%. If BoI has reduced its fixed rates, it may well be that you can break out of your fix, free of charge, and re-fix at a lower rate.
Or you may break out of your fix and switch to another cheaper lender.
Or you may be happy enough with the 3.2% rate given that it's fixed for the next two years and stay where you are.
2) The legislative change does not happen, Irish lenders continue to overcharge, and in time, ECB rates rise.
In that case you would be much better off if you had chosen a fixed rate.
Provisional conclusion
The mortgage rate market in Ireland is dysfunctional
The 2% cash back distorts the market further, but people should avail of it while they can.
Fixed rates are lower than variable rates, although they should be higher.
The cost of breaking out of a fixed rate is likely to be very close to zero.
Borrowers should choose a fixed rate but keep an eye on the market and consider breaking out of the fixed rate if and when mortgage rates fall over the coming months.
Brendan
But as Red Onion has pointed out in this thread:Understanding Fixed Rates breakage costs
the cost of breaking out of a fixed rate mortgage is likely to be much lower than people expect, and may well be zero.
So, looking at the Mortgage rate tables for maximum 90% LTV mortgages for example, let's compare the following options:
Fix with Bank of Ireland for 3 years at 3.2% and get 2% cash back.
Go variable with EBS for 3.7% with 2% cash back.
What are the likely scenarios?
1) Variable mortgage rates gradually fall by 1% - fixed rates fall as well, but by 0.5%
Legislative change bans cash back and forces banks to compete on mortgage rates alone.
This could happen toward the end of the year, but let's say it doesn't happen until July 2018
Some other lender brings their variable rate down to 2.7%
If you opt for Bank of Ireland, you will be paying 3.2% instead of 2.7%.
You will be fixed for another 2 years at 3.2%. If BoI has reduced its fixed rates, it may well be that you can break out of your fix, free of charge, and re-fix at a lower rate.
Or you may break out of your fix and switch to another cheaper lender.
Or you may be happy enough with the 3.2% rate given that it's fixed for the next two years and stay where you are.
2) The legislative change does not happen, Irish lenders continue to overcharge, and in time, ECB rates rise.
In that case you would be much better off if you had chosen a fixed rate.
Provisional conclusion
The mortgage rate market in Ireland is dysfunctional
The 2% cash back distorts the market further, but people should avail of it while they can.
Fixed rates are lower than variable rates, although they should be higher.
The cost of breaking out of a fixed rate is likely to be very close to zero.
Borrowers should choose a fixed rate but keep an eye on the market and consider breaking out of the fixed rate if and when mortgage rates fall over the coming months.
Brendan