There is nothing quite like turning on the radio on the drive home from work, listening to Matt Cooper speak about the latest rise in interest rates and trying to figure out what this means for you and your mortgage.
For the average person, it can seem like something completely removed from the reality of their personal circumstances; every few months the banking big wigs throw the dice to see which way interest rates will roll for the foreseeable future. And what we’ve seen in the last few months from many lenders has been an increase in rates while for many Irish people their finances have continued to deteriorate.
At Taylor Solicitors Cork, we are continually asked by clients buying property should they fix their mortgage interest rate. If I had a crystal ball, I’d be able to hand out this type of advice. But I can’t and in reality, no one can give you a definite picture of exactly where rates are going in the long term. Aside from this, different rates and terms will suit different people depending on their lifestyle and plans for the future.
Having said that, I do find there can be confusion over what these different rates mean. Generally, when you take out a mortgage you will be given the option of fixing your rate or taking a variable rate. What are known as “tracker rates” still feature in the market although for the most part banks aren’t offering tracker rates for new mortgages.
Virtually all lenders will give you the option of fixing your interest rate today, for a specified amount of time. This can be for any term from one year up to twenty years or more. For the most part, the longer term you choose to fix the rate, the higher the rate will be.
So why would you choose to fix your rate? The big advantage of fixing your mortgage interest rate is that you will know exactly how much repayments will cost you over the fixed term. Interest rates can go up or down throughout the term and this won’t affect your repayments as you will have locked in at a specific rate. For many people, this gives incredible peace of mind and allows them to budget their money more effectively.
The down side is that if the bank drops the variable or fixed rates in the future, you are tied to the higher rate. It’s important to note that fixed rates are less flexible than variable and tracker rates. For example, with a fixed rate you can’t make any additional payments or redeem the mortgage early without a penalty. These penalties can be quite substantial and are somewhat dependant on the length of time remaining in the fixed period.
Before you fix your rate or decide on the length of time to fix the rate, consider your future plans. Is there a possibility that you will change lenders, or decide to move house within the fixed period? If so you will end up paying penalty fees.
Variable & Tracker Rates
Variable and tracker rates are similar in that if general interest rates go up or down, the variable and trackers rates will go up or down accordingly. Tracker rates are tied into the European Central Bank (ECB) rate, and generally the bank’s tracker rate will be the ECB rate plus a percentage. This percentage is agreed at the outset of the mortgage and means that the lender can’t unilaterally decide to increase rates – rates increase only if the ECB raises their rates. In contrast, if you have a standard variable rate, the lenders can in theory raise the rate whenever they like. In the present market tracker rates remain low while for the most part, lenders have been increasing their variable rates. Unfortunately most banks have stopped offering trackers so for most people taking out their first mortgage variable or fixed are the main options.
As I said, you need to consider your own circumstances and the rates on offer before deciding what is right for you and your mortgage. When you are signing your mortgage documents your solicitor will explain the legal implications of both the mortgage and the rate you have chosen. If you don’t understand something, make sure you ask questions because at the end of the day your mortgage will be with you for many years to come.
Taylor Solicitors Cork