Should I fix?

R

Rebel2008

Registered User
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Hi, with all this talk of fixing mortgages I'm wondering should I do the same. I'm currently paying 2.63% on variable and the options for fixing are:
3 Year 4.05%
5 Year 4.60%
10 year 5.45%
I don't have the option of moving my mortgage.
Would anybody out there have any advice?
Thanks, Rebel
 
Hi Rebel - I am in exactly in the same boat as you! Looking at the option of fixing at 4.05% for 3 years. Anyone any advice? EBS are set to increase their rates next week so I am going to have to make a decision today!
 
Thanks for that Fizzelina.
Affordable27 I think I will fix too and probably will have to decide today but I'm not sure whether to fix for 3 or 5 years. Some people seem to be saying that 3 years is a bit short. What does anyone else think?
 
Here's what you need to think about.

The 5yr option you have been offered is c.2% above what you are currently paying.

Therefore, in order for you to break even then e.g. variable mortgage rates would need to rise to 6.6% (i.e. 2% above the fixed) for the same duration that they are currently 2% below the fixed rate e.gs if banks margin remains the same:

The ECB rate will be 1% for the next 2.5 years and then jump to 5% for a duration of 2.5 years.

or

The ECB rate will be 1% for year 1, 2% for year 2, 3% for year 3, 4% for year 4 and 5% for year 5. (i.e. averaging 3% for the next 5 years).


Also, in general terms, if you want someone to take a risk on your behalf, you will have to pay them to do so. If you want a bank to take the financial risk of interest rate changes, then you will have to pay them to do so. So, on average, it is always more expensive to have fixed rate loan than a variable or tracker. The questions you need to ask is can I afford the luxury of someone else taking the risk on my behalf and is the excess price paid to take the risk worth the benefits you see of having payment certainty?
 
3 years fix is plenty. That should give you enough time to build up a lump sum to pay the damned thing off quicker. It is also cheaper.

You need to look ahead and see where you might be in 3/5 yrs - married, different job, kids etc. Fixing the mortgage means you lose flexibility if you want to change things.
 
csirl said:
Therefore, in order for you to break even then e.g. variable mortgage rates would need to rise to 6.6% (i.e. 2% above the fixed) for the same duration that they are currently 2% below the fixed rate e.gs if banks margin remains the same:

The ECB rate will be 1% for the next 2.5 years and then jump to 5% for a duration of 2.5 years.

or

The ECB rate will be 1% for year 1, 2% for year 2, 3% for year 3, 4% for year 4 and 5% for year 5. (i.e. averaging 3% for the next 5 years).
Click to expand...

Your calculation above is based on two very flawed assumptions:

(i) the OP's variable rate could remain at 2.6% for the next 5 years. Clearly this is not going to happen. It is likely to increase to c. 3.1% in the next week or two and at least another .5 before the end of the year.
(ii) the ECB is the only factor which determines variable or fixed rates. As we have seen with PTSB, AIB, BOI and now EBS the rates they charge are driven not just by the ECB but by the cost to them of borrowing money and the requirement to increase profit margins. These two factors will continue to be the driving force behind the current and future waves of rate increases not the ECB rate.
 
promoter said:
Your calculation above is based on two very flawed assumptions:

(i) the OP's variable rate could remain at 2.6% for the next 5 years. Clearly this is not going to happen. It is likely to increase to c. 3.1% in the next week or two and at least another .5 before the end of the year.
(ii) the ECB is the only factor which determines variable or fixed rates. As we have seen with PTSB, AIB, BOI and now EBS the rates they charge are driven not just by the ECB but by the cost to them of borrowing money and the requirement to increase profit margins. These two factors will continue to be the driving force behind the current and future waves of rate increases not the ECB rate.
Click to expand...

Banks are aware of all the above and factor it into their fixed rate.

In general terms, it will cost you money to pass on a financial risk to another party. The average person fixing their mortgage will pay more than if they did not fix.
 
csirl said:
Banks are aware of all the above and factor it into their fixed rate.

In general terms, it will cost you money to pass on a financial risk to another party. The average person fixing their mortgage will pay more than if they did not fix.
Click to expand...
Yes banks are aware of them but your calculation ignores them. You cannot compare one thing which is actual (fixed rate) against another thing which is impossible (variable rate remains the same) and expect a reliable conclusion.

In some circumstances such as insurance or life assurance, I agree that it will cost you money to pass on a financial risk to another party. However, this is a particular type of risk (actuarially calculated) and is entirely different from other types of risk.

On what basis do you make your assertion that "The average person fixing their mortgage will pay more than if they did not fix"?
 
promoter said:
In some circumstances such as insurance or life assurance, I agree that it will cost you money to pass on a financial risk to another party. However, this is a particular type of risk (actuarially calculated) and is entirely different from other types of risk.

On what basis do you make your assertion that "The average person fixing their mortgage will pay more than if they did not fix"?
Click to expand...


You will always pay to have someone take a financial risk on your behalf, regardless of what that risk is - thats the way banking/financial markets work full stop. If you ask a bank to take a risk, it costs them the value of the risk premium associated with the particular risk. With mortgages, where interest rates can vary considerably over the course of the loan, the risk premium will be quite high. The cost of this particular risk (in addition to the cost of all the other risks associated with mortgage lending) is passed onto the customer in the form of higher interest rates. This is the reason that fixed rate interest rates are, on average, higher over the couse of the loan.
 
Its a difficult decision Rebel, a family member in exact same position and she was advised by someone who's very senior in bank to fix for 3yrs based on future predictions, she got fixed rate of 4.06% with EBS last week. I hear EBS are picking rates out of the air between 4% and 4.6%!

I've a tracker +1.25%, worried what the future will bring as paying mortgage solo but have been advised i'd be mad to fix from a tracker, totally dont know what to do myself!!
 
I went with EBS's 3yr fix of 4.05% about a month ago, the 5yr was a good rate but personal circumstances meant the 3yr was a better option, but i have a feeling in 3yr's time i'll wish i had of went for the 5yr fixed.

I wasn't that worried about the ECB rising rates, as i think they wont want to shock any economy with huge hikes soon after a world-wide recession. I'd guess by the end of 2011 the ECB wont be above 3%.
I was more worried about bank margins, and a quick look at the UK standard variables give a clear picture of how our banks rates here would be without gov intervention, 5-7% is common place and their Central Bank rate is only .5%, so margins are huge compared to here.
 
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