To fix or not to fix?

I want to start a discussion on the pros and cons of fixing your mortgage interest rate. I feel with the current interest rate climate there has to be a lot of people in a similar situation to me at the moment.

Myself and my partner (both ftbs) bought our home in September 2005 for €330,000. We had our deposit and we borrowed €297.500 for 35 years at a fixed 1 year interest rate of 2.25%. The repayments currently are €951 per month. Our combined earnings are €60K and we have no savings.

With the impending flurry of interest rate rises expected I rang our mortgage provider this morning (perm tsb) to find out how much we could fix our mortgage for today.

The quotes I got (after the tax relief is deducted) are as follows:
2 year fix (4.65%) - €1450 monthly repayment
3 year fix (4.85%) - €1487 monthly repayment
5 year fix (4.99%) - €1515 monthly repayment.

So my question is should we fix today and how long should we fix for?

I also have one other question to ask - the property is valued at €380K today, if we were to sell to go back renting what would it cost us both today and then in the future (ie. when we buy our next home as we won't be ftbs anymore). I know there is a full thread on this but the actual costs of selling up are not mentioned.

Any comments would be very much appreciated.

Thanx,
Ann.

There are lots of existing threads on the fixed versus variable/tracker issue which are worth reviewing. In particular dealing with the reasons for and against fixing versus going with a competitive variable/tracker rate. Ultimately it doesn't make sense to attempt to time the market and gamble on a fixed rate to save money. In general you will pay a premium over and above what you would pay in interest on a competitive variable/tracker rate. If you are tight one money to meet mortgage repayments and need the peace of mind that fixed repayments bring you then you might want to look at fixing.

You really need to crunch the numbers. On the above figures you are paying an additional 1% to fix over 2 years. You should be able to get a tracker rate for .9% over the ECB rate.
Interest rate would have to rise by approx 2% over the next two year for you to break even.
I have worked out that you will gain approx 200 over 2 years if you were to fix now and assuming a rate increase of .25% every 3 months for the next 2 years.
Is it worth fixing for this?

Asdfg, thanx a million for your reply. May I ask how you worked that out.

From my understanding the ECB base rate went up to 2.75% today and you can add about 1.25% to that to get what your lender will charge you on a standard variable rate. Therefore assuming another .25% interest rate rise in September (the month our fixed interest rate expires) the variable rate will be about 4.25%. Then as another interest rate hike is expected in December I don't really understand why it would not be better to fix now for 2 or 3 years.

Ann1977 said:

From my understanding the ECB base rate went up to 2.75% today and you can add about 1.25% to that to get what your lender will charge you on a standard variable rate.

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Not necessarily. There are tracker rates on offer as low as ECB + 0.99% for example and maybe even lower in certain circumstances (e.g. low loan to value ratio, mortgage of a certain size etc.) and with some haggling. See here.

Therefore assuming another .25% interest rate rise in September (the month our fixed interest rate expires) the variable rate will be about 4.25%.

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Assuming that they pass on the ECB rate increase in full. Quite likely of course but not guaranteed except on a tracker.

I don't really understand why it would not be better to fix now for 2 or 3 years.

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Because, in general, a competitive tracker rate will work out cheaper than a fixed rate over such a period of time, nobody can predict interest rates and while they are likely to increase in coming quarters this may or may not actually happen, fixed rates are inflexible and preclude lump sum capital repayments, switching etc. without the payment of significant fixed rate breakage penalties etc.

Asdfg, thanx a million for your reply. May I ask how you worked that out.

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Try Karl Jeacle's mortgage calculator for modelling different mortgage scenarios.

First of all ask your lender to quote a tracker rate. You should be able to get a rate of approx .9 or even less over the ECB rate of 2.75% (new rate). If they refuse shop around.

In my calc I used a rate of 3.7% (ECB rate of 2.75 plus .95%) increasing this every 3 months by .25%. I got to a rate of 5.45%
I then calc the new monthly repayment associated with each rate increase. This can be done very easily using excel. There is a function called @pmt(rate/12,no of years*12,principal) to calc the new monthly repayments.
I then used the fixed rate over 24 months and compared the two results.
Hope this makes sense.

Unfortunately I can't transfer the details to AAM as there is no table function and figures get disported and are difficult to follow.

There is a function on google just released that may allow this. I'll investigate tonight and post if it works.

Don't forget that you are fixed until sept so unlikely you can fix now at the rates quoted

Post crossed with clubmans

Myself and my partner (both ftbs) bought our home in September 2005 for €330,000. We had our deposit and we borrowed €297.500 for 35 years at a fixed 1 year interest rate of 2.25%. The repayments currently are €951 per month

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On rereading yor post I calculate your repayments are 1,024.10 per month before TRS. You appear to be only claiming one part of the TRS.
Both of you can apply up to a max of 4,000 @ 20% = 800 /12 = 66.66 each.
I calculate your interest repayment as 6,694 @20% = 1339 / 12 = 111.57/2 = 55.78 each.

I'd say fix.

Lots of posters will say that you can't time the market but it's a fact that rates have been at a historic low for the past five years and they are now on the increase. When they will stop rising is impossible to say but an ECB rate of 3.5% and 4.5% is near the historic 'norm'. So I think (and it is only my view!) ECB rates will rise to a peak of 4.25% followed by a drop of .25% and hold around 4% for a couple of years. In fact it may be long time before we all enjoy the extra low rates of the past few years.

If you are right that the ECB rates are going to peak at 4.25 then most trackers will only cost 5.25 (ECB+100bp) and if they keep going with the pace they are going at the moment, it will be 15 months before they reach that level and alot can happen in that time. I certainly wouldn't try and second guess the ECB! In the meantime as per the original post, they could be tied into a 5yr fixed at 4.99%. Not exactly bargain of the centuary. It all comes down to personal preferences though.

Some institutions are also now offering a tracker with a 5% cap. I think the tracker rate is 1.25% over ECB which isn't the cheapest you'll get but you get the peace of mind of never having to pay over 5%.

Dowee said:

Some institutions are also now offering a tracker with a 5% cap. I think the tracker rate is 1.25% over ECB which isn't the cheapest you'll get but you get the peace of mind of never having to pay over 5%.

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Who offers that cap?

I know IIB do, not sure who else

I checked their website and couldn't see anything about the offer... Do you have a link or something? A tracker with a cap of 5% sounds very interesting...Almost too good to be true!

askalot said:

Lots of posters will say that you can't time the market

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Including yourself!

When they will stop rising is impossible to say...

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So I think (and it is only my view!) ...

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In fact it may be long time ...

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Sunny said:

I checked their website and couldn't see anything about the offer... Do you have a link or something? A tracker with a cap of 5% sounds very interesting...Almost too good to be true!

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Ye don't see it there myself. I guess call them for the details as I'm not 100% sure of the ins and outs other than what I mentioned above.