Key Post Is there any downside to fixing your rate for a longish term at present?

Brendan Burgess

Brendan Burgess

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In a normally functioning market, if interest rates are expected to rise, fixed rates should be higher than variable rates.

But the Irish market is dysfunctional, and all lenders have higher variable rates than fixed rates.

So you are getting the insurance of a fixed rate for free.

The main argument against fixing is that there may be a penalty for early repayment.

But the way breakage costs are now calculated, if the money market interest rates rise, the break fee will fall and may well be zero.

So the conclusion is that you should fix for a longish term.



Brendan
 
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Just to be absolutely clear. This relates to the market conditions as of December 2021.

When the general level of interest rates and mortgage rates in particular are higher, it may not make sense to fix.

Brendan
 
So how long should you fix for?

If it makes sense to fix, then it probably makes sense to fix for as long as you expect to have the mortgage.
So if you expect to pay your mortgage off over the next 10 years, fix for 10 years.
If you expect to trade up after about 7 years, then fix for 7 years.

Taking the current Avant rates to illustrate the point. These are for illustration purposes only. Rates will change and if you are borrowing from another lender, the figures may be different.

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There is so little difference between 10 years and 3 years, that fixing for 10 years seems right.

A longer-term fix such as 30 years seems wrong. Most people trade up or overpay their mortgage within about 10 years. (However, if you fix for 30 years with Avant and later trade-up, you can keep the fixed rate under most circumstances.)

Even if you don't trade up or overpay your mortgage, you will have paid off about 25% of the capital in 10 years with normal monthly repayments.

So paying 3.1% instead of 2.35% does not seem right.

One reason why you might not fix for longer than 3 years

Although ECB rates are expected to rise, Irish mortgage rates are twice the eurozone average. There is very little competition in the Irish mortgage market. So it's just possible that ECB rates could rise, but Irish mortgage rates would actually fall. So it's possible that after three years, you could fix for a longer term at lower rates than are available at present.
 
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It shouldn't come as a surprise to anyone that I mostly agree with the above; most people who don't have very low tracker mortgages should probably fix. Not only is the 'insurance' of fixed rates now free, but it's cheaper than the equivalent variable rate across all lenders.

How long should you fix for though? Money market rate predictions aside, yes, I think margins are going to tighten a bit, but I think we'll see the low rates we currently see around the 2% mark being available for longer, rather than rates materially dropping below 2%. I can't see a position where anyone will look back in a few years a regret fixing at, or near, 2%. Some of the lenders have inverse rate curves, so fixing for a short term in the hope better rates will be lower in 2 or 3 years will actually cost you more than just fining now for the 4 / 5 year term.

Personally, if I was a FTB now and getting a mortgage, I'd be fixing anywhere out to 10 years. There's a great comfort to certainty, especially if planning a family and other large expenses that are going to stretch you. Almost all lenders allow overpayments to a degree without a break fee.

There's only one thing I don't like about the AvantOne product: you can only fix for the full term. So to get the 15 year rate, you have to repay over a 15 year term. If you want a 30 year repayment term, you can only pick the 30 year rate (or of course one of their shorter term rates on their standard product).

If going for a longer term fixed rate, the Finance Ireland rates are a better option, especially as you benefit from the lower LTV rates as your LTV. decreases over the term.
 
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I tend to agree.

Policy rates cannot go lower. I don't see how retail rates can fall much lower than another 20 or 30 bps given the cost structures in the Irish market. So there is not much downside to fixing.

In the real world inflation has risen and if it continues to stay high then central bankers will have to react by increasing rates. I would say there is a small chance of very big rate increase (300bps), and reasonable chance of something like 100bps over the next 3 years. So it is cheap insurance against big increase

I have to fix again in January. For the last few years I've taken one-year rates which have been cheaper and haven't lost out. But I'm really considering fixing for three or even five years this time.
 
This is in line with my thinking and we're 70% the way through changing to a 15 year fix with FI.

If rates go up, we're safe, if rates go down enough to warrant it, we should be able to re-fix
If we move and rates have gone up, we've protected the "original portion" of the mortgage while adding a new higher piece and getting a lower mid-point blend.
If we move and rates have gone down, we can take advantage of those and our blend is lower than or original fix.

There is also a notional floor to rate drops but no equivalent ceiling, so risk one way is greater the other, excluding trying to estimate probability of it happening.

We'll also have piece of mind, and no more effort in changing, during that period which carries weight
 
ThatNewGuy said:
if rates go down enough to warrant it, we should be able to re-fix
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Just to make it absolutely clear. The calculation of break fees is very counter-intuitive.

If money market rates go down from the time you fixed, there will be a break fee.
If money market rates go up, there should be no break fee.

So the ideal scenario for someone fixing now, is that money market rates go up and mortgage rates go down.Then you can break without a break fee and fix again at a lower rate.

But if money market rates and mortgage rates go down , then you will have to do the calculation to see if the break fee justifies the savings from fixing at a lower rate.

Brendan
 
RedOnion said:
if I was a FTB now and getting a mortgage, I'd be fixing anywhere out to 10 years.
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Hi Red

I agree with you, but would be interested in why you limit it to 10 years?

And why is it that in other countries fixing for 20 years or 30 years is common?

Brendan
 
Brendan Burgess said:
agree with you, but would be interested in why you limit it to 10 years?
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It's largely personal, rather than logical.

I think there's relatively good value up to 10 years, and I think certainty for the first few years is important.

But it's more personal beyond that. I never had it in my financial plans to have a mortgage for 30 years, or that my first house would be my last.
 
Mortgage rates were 8% when I took out my first home loan. The thought of big rises was quite terrifying and if a cheaper fixed rate option was available at the time, I'd have bitten the bank's arm off!

My daughter bought her first property a couple of years ago with a 30 year fixed loan from Rebuilding Ireland. The peace of mind it brings is enormous.

If you can fix for the long term at a lower rate than the variable, go for it.
 
Baby boomer said:
If you can fix for the long term at a lower rate than the variable, go for it.
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It is a remarkable opportunity and should be grasped while it lasts.

The front page of tomorrow’s FT has an article on inflation in Germany exceeding 6% and being at its highest since 1992.
 
I struggle to see the downside of fixing with the likes of ICS or Avant?

Low rates and the ability to repay 10-20% of the principal each year.

Realistically, that should give more than enough flexibility to the vast majority of people.

Very few people are generating cash surpluses each year equal to 10-20% of their outstanding mortgage.
 
Great info above. I'm about to complete a switch to Avant for 7yrs fixed @1.95% but I'm wondering if I should instead switch to their 10 year fixed @2.1% for extra 'security' in case mortgage rates are higher in 7 years time. It's crystal ball question I assume but any advice welcome. €295k balance with 23yrs remaining. €442 difference per year in interest payments between them (or €3097 difference over 7 years). Limited potential future room to overpay.

Related, both products currently have a follow on variable rate of 2%. Does that 2% contractually remain available to me after the fixed term ends even in the scenario where variable mortgage rates are higher than 2%?
 
OK, let's use this as an example.

If you fix for 7 years at 1.95%, you will pay €35,242 interest over the next 7 years

If you fix for 10 years at 2.1%, you will pay €38,033 interest over the next 7 years.

So the additional cost over the next 7 years will be say €2,791

After 7 years, the balance on your mortgage will be about €220k.

Let's say that the fixed interest rate for 3 years at that stage has risen to 3.1%

So for the next three years, you will pay 3.1% instead of 2.1%
So you will pay an extra €2k a year.

So you are better off fixing for 10 years.

Brendan
 
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gargoil7 said:
Limited potential future room to overpay.
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This suggests to me that the reassurance of a fixed repayment for 10 years will give you a lot of comfort.

No one knows the right answer, but on balance, fixing for 10 years seems right.

If you were in a position to overpay, then fixing for 7 years would be better.

Brendan
 
gargoil7 said:
Does that 2% contractually remain available to me after the fixed term ends even in the scenario where variable mortgage rates are higher than 2%?
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That is a variable rate and so it can be varied by Avant at any time. It is likely to be higher in 7 or 10 years.

Brendan
 
Brendan Burgess said:
So the additional cost over the next 7 years will be say €6,000
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There is something a little off with your calculation here Brendan. Interest only on €295k for 7 years with a 0.15% difference would only be €3100.

Very crudely, let's say the average balance over the 7 years is more like €260k. The 0.15% difference would be roughly €2750.

So it is buffer of 0.4% buffer after year 7 on the €220k balance. If at year 7 the best rates available were 2.5%, then it would be roughly break even.
 
_OkGo_ said:
There is something a little off with your calculation here Brendan. Interest only on €295k for 7 years with a 0.15% difference would only be €3100.
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Yes, this is in line with my own €3097 figure above. I appreciate Brendan's effort & help here & I was due to acknowledge same by reply but I too wondered where the €6k figure came from.

_OkGo_ said:
Very crudely, let's say the average balance over the 7 years is more like €260k. The 0.15% difference would be roughly €2750.

So it is buffer of 0.4% buffer after year 7 on the €220k balance. If at year 7 the best rates available were 2.5%, then it would be roughly break even.
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Thanks, so choosing the 7 yr term over the 10 yr term a gamble on whether or not mortgage rates will be higher than 2.5% in 7 years time, something obviously nobody can foresee.
 
_OkGo_ said:
There is something a little off with your calculation here Brendan. Interest only on €295k for 7 years with a 0.15% difference would only be €3100.
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Thanks for the correction.

I think I must have used the wrong interest rate in the calculation.

I have revised the original figure - it comes out at €2,791

So it's clear. Fix for 10 years.

Brendan
 
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