Will rising inflation mean higher mortgage interest rates?

[daraclare]

Would appreciate some opinions on this. We've a smallish mortgage of €105k and LTV less than 50%. We currently overpay our mortgage by about €1k a month, making our repayments about €1700 a month. We currently are on a variable rate of 2.75%.

I'm considering switching to a fixed mortgage as I'm worried that the rising inflation will mean higher mortgage rates - is this a valid concern, or should I stay as I am?

Any advice very welcome, thanks.

 

[ClubMan]

Is 2.75% the cheapest variable rate on the market for< 50% LTV? I wouldn't have thought so but I'm not really up to date with mortgage rates these days. Maybe this thread might be worth checking?

Key Post - First Time Buyer mortgage guide

Some tips and Frequently Asked Questions when applying for a mortgage as a first-time buyer (FTB)... Start by getting mortgage approval from the lender you bank with If you have your current account with Bank of Ireland, then apply directly to them for a mortgage. Assuming you have a good...

www.askaboutmoney.com

Rather than trying to time the market with fixed rates which are priced according to the expected risk of interest rates falling/rising would you save more by maybe switching to a cheaper variable rate lender?

 

[jpd]

Yes, higher inflation will lead to higher interest rates in due course - but no one can when interest rates will rise or by how much, so ...

 

[ryaner]

A lot of fixed rates allow you to overpay by 10% of the outstanding balance too. You could switch and lower the term too to account for the increased payments you are making.

Word of warning though is a lot of mortgages seem to have a minimum amount of €100k and some brokers only deal with €200k+.

 

[skrooge]

I'd look to fix.

Firstly fixed rates are lower than variable rates. So you're saving money on the whole balance.


Secondly, as other people have mentioned many providers allow a percentage overpayment. So you have some flexibility. Even if you want to overpay by beyond this you can. Yes there may be a break fee but it will be a fee that only applies on what you over pay. In short you save on (or rather insure) the whole balance against short term interest rate moments at a potential cost of a charge on the likely much smaller amount you wish to repay. Some lenders cap the break fee (Ulster and Avant) it's also worth noting if you're an AIB customer the way they calculate break fees means for certain fixed rates there is no break fee given the structure of their rates.

Thirdly, if interest rates rise and you want to overpay it's very likely your break fee will be zero. Higher market rates (relative to when you fixed) will likely mean the break fee will be close or equal to zero.

Finally, for many providers it doesn't have to be black and white. You can split your mortgage across both fixed and variable. With the best will in the world you know there is a portion of your mortgage you will not be able to pay off in the short term. Fix that and set about overpaying the smaller variable portion. Personally I feel this last approach is likely to be more expensive than fixing the whole lot and dealing with potential break fees but it is also likely cheaper than leaving everything variable.

 

[PolkaDot]

Are you with AIB? Their method of calculating break costs means they are very often zero. So by fixing you get the upside of lower rate and protection against rising rates. You just won’t really be able to overpay on a monthly basis. Maybe do it once a year.

 

[skrooge]

You just won’t really be able to overpay on a monthly basis. Maybe do it once a year.

How difficult is it to actually overpay with AIB? Logistically I would have thought apart from a phone call/ providing written instruction it wouldn't be much more than organising a transfer of funds?

 

[daraclare]

Thanks for all the replies, apologies, I wasn't subscribed to the thread.
I am with AIB, it's awkward to overpay with them, unless you change the amount paid every month like we have.
Ideally, if I changed to fixed, I'd like to keep paying €1700, but then am I leaving myself open to losing my home if something happens and I can't work and make repayments? At least now I can just go back to paying €700 a month if we ended up in financial difficulty. We're a single income house, although my income is pretty good and stable.

We're on 2.75% with AIB, I think the lowest we can fix is at 2.15% with AIB, but I'll look and see what the rates are if we switch.

Thanks again all!

 

[Gordon Gekko]

In an overall sense, rates should increase, but Ireland is an outlier in that our rates are higher already with competition driving them down.

Having said that, I’d have zero buyer’s regret fixing at circa 2% right now.

 

[Itchy]

It seems to me that we have a structural shift in the mortgage market. The non-bank lenders are competing aggressively at the moment and there are more due to enter the market (MoCo for example). While Avant cherry picked at the start, they are established and open to all/most now. The main driver of bank mortgage rates is operational costs and the new players don't have legacy systems, high staff levels or a branch network to maintain.

ECB rate forecasts (for what they're worth) indicate 0.25 bps rise out to 2023. Provided inflation is tempered, ECB rates wont influence retail mortgage rates that much. BankInter in Spain offer 30 year money for 1.45%. Their inflation expectations are not impacting their product. This is also reflected by the retail rates on offer at the moment e.g. Avant are offering the same rates to customers who fix for either 3 or 7 years. So they do not expect their profit margin to be eliminated over 7 years (and may increase their profits if cost of finance declines). In fact looking at Avants rates, for a >80% LTV borrower, a 4 year fix (2.15%) is cheaper than a 3 year fix (2.2%)! Avant latest round of rate reductions only impacted the higher credit risks/LTV's and they did not lower their lowest rate. It seems that there is some cross-subsidising going on and this would also align with the fact that they introduced cash back for UB/KBC customers (temporarily but for how long?!). So I would say there is still some fat even in the 1.95% rate.

Also, Avant for example have a rate that is 0.25% cheaper for a <60% LTV borrower vs. a >80%LTV. I dont think this is reflective of the credit risk differential between the two borrowers. With a non-bank cherry picking customers, there is no reason why we couldn't see 1.5% rate or lower. We need competition (and switching) to get there though.

 

[jpd]

One of the reasons that mortgage interest rates are higher in Ireland than in the EU is because of the costs and difficulty of enforcing repossession when the mortgagee gets into difficulty and stops paying the mortgage.

Newcomers, no matter where they are based, have to facture this cost into their calculations

 

[Itchy]

Impairment charges are approx. 7.5% of the cost

I was forwarded a note by Goodbody Stockbrokers which I thought was interesting - I had not seen the analysis before.

Our prior research shows that the average funding cost for the banking sector is 40bps (including cashback cost), the average Opex is 105bps, the average impairment charge equates to 20bps and the capital charge is 50bps. This leaves a profit market of 47bps, equivalent to ROEs of <20%, similar to peers in Europe. As such, the key delta going forward we think will be opex (banks have cost save programmes in place) and the capital charge as new lending on lower RWAs and underwritten under the macro prudential rules replaces legacy loans with higher RWAs. On the latter, c.33% of mortgages have been underwritten under the macroprudential rules and is expected to climb to c.50% by end 2023 and then c.65% by end 2025. This could see rates drift down but ROEs remain unchanged.

Eamonn Hughes

Financials Analyst

This is my table from the above:

View attachment 5915
Brendan

 

[DublinHead54]

Isn't it economic / monetary policy to raise interest rates to stabilize / decrease inflation? This will lead to rising mortgage rates.

I believe the levels of central bank rates we see today have always been intended as a short term policy on the back of the financial crisis. Central banks have been discussing rate increases for years, and perhaps we would have seen some if COVID hadn't hit.

How long this takes to impact the Irish mortgage market, I'd guess we should be ok for the next 3-5 years.

 

[ClubMan]

I believe the levels of central bank rates we see today have always been intended as a short term policy on the back of the financial crisis.

That's a very long short term!

Official interest rates

The three official interest rates the ECB sets every six weeks as part of its monetary policy to steer the provision of liquidity to the banking sector.

www.ecb.europa.eu

 

[NoRegretsCoyote]

Isn't it economic / monetary policy to raise interest rates to stabilize / decrease inflation? This will lead to rising mortgage rates.

Indeed. But the walk from policy rates to retail rates is not straightforward.

Policy rates fell 400bps 2008 to 2011 but Irish banks didn't reduce non-tracker rates by nearly as much for various reasons.

 

[DublinHead54]

That's a very long short term!

Official interest rates

The three official interest rates the ECB sets every six weeks as part of its monetary policy to steer the provision of liquidity to the banking sector.

www.ecb.europa.eu

ha yes, I meant to say the short term but long term! But they have been talking about raising rates since 2016!

Indeed. But the walk from policy rates to retail rates is not straightforward.

Policy rates fell 400bps 2008 to 2011 but Irish banks didn't reduce non-tracker rates by nearly as much for various reasons.

I agree, but theoretically if central banks raise rates to combat inflation, eventually it will trickle down and impact retail products. Maybe initially in deposit rates and later in mortgage products.

 

[time to plan]

In an overall sense, rates should increase, but Ireland is an outlier in that our rates are higher already with competition driving them down.

Having said that, I’d have zero buyer’s regret fixing at circa 2% right now.

Agreed. Am currently midway through switching to a 7 year fix @ Avant @ 1.95%. The overpayment facility means I should get it paid off in 7 years, and be sheltered against the risk of some of the mortgage rates that have been seen in the recent past. People forget very easily! 1.95% is a steal in historic terms, even if people have legitimate gripes when looking at current rates in other Eurozone countries.

Irish Mortgage Interest Rates since 1975​

The highest rate reached in each year is shown below – based on the average rates of “representative building societies” from the Central Bank and the CSO

Year	Highest Mortgage Interest Rate
1975	12.5%
1976	13.95%
1977	13.96%
1978	14.15%
1979	14.15%
1980	14.15%
1981	16.25%
1982	16.25%
1983	13%
1984	11.75%
1985	13%
1986	12.5%
1987	12.5%
1988	9.25%
1989	11.4%
1990	12.37%
1991	11.95%
1992	13.99%
1993	13.99%
1994	7.49%
1995	7.00%
1996	6.75%
1997	6.9%
1998	5.85%
1999	5.6%
2000	6.09%
2001	6.9%
2002	4.7%
2003	4.2%
2004	3.49%
2005	3.65%
2006	4.86%
2007	5.46%
2008	5.86%
2009	4.16%
2010	4.02%
2011	4.42%
2012	4.33%
2103	4.38%
2014	4.2%
2015	4.05%
2016	3.61%
2017	3.44%
2018	3.21%
2019	3.02%
2020	2.92%
2021	2.8%

 

[Protocol]

I am doing the same, applying to switch to Avant, trying to lock-in 1.95% for five or seven years.