During the era of record-low interest rates, mortgage holders rarely paid any attention to the switch, although central bank research in 2020 showed home loan holders could save €1,000 in just the first 12 months after a switch.
But that all changed this year as inflation squeezed disposable income, the European Central Bank (ECB) began raising interest rates for the first time in 11 years, and KBC and Ulster Bank prepared to leave Ireland in search of savings. According to the Banking and Payments Federation, the value of non-purchase mortgages (most of which came from a switch) was 441 million euros in July, up 148 percent from the same month last year.
In fact, switching activity is now the main driver of new mortgage activity as more homeowners look to lock in to fixed interest rates to protect themselves from further rate hikes. The ECB is expected to hike borrowing costs on Thursday and twice more before the end of this year. The surge in bill volume means lenders and mortgage brokers are being inundated with requests from mortgage holders trying to lock in a fixed rate ahead of the ECB’s next rate hike. That means the process is now taking about eight to nine weeks for some lenders, says Gerry Hiney, managing director of Switch My Mortgage and Park Financial Planning.
“I’ve been in the business for a very long time, and we’ve never seen the sheer volume of business, which is all exchange deals that need to be done quickly,” says Hiney. “Changers are in a race against time and every case is urgent as non-pillar banks have hiked rates and pillar banks have not, but it is only a matter of time before they do so. The real benefit of a fixed rate is that whatever term you choose, you know your repayment will not change.”
At a time when finances are stretched, it’s crucial to get some peace of mind about what’s likely to be your biggest household bill: Up to a third of low-income mortgage holders could face financial difficulties trying to make loan repayments perform if recent inflation rates are sustained, a recent central bank paper warned. But with another ECB rate hike, is it too late to start a mortgage switch now, and will it be worth the cost and hassle involved? Here are some factors to consider to ensure your monthly repayments are as low as possible.
How much could my mortgage payments increase if I do nothing?
Until recently, the ECB was expected to repeat its July rate hike of 50 basis points – half a percentage point – next week. But a host of policymakers have backed a 75 basis-point hike on the worsening inflation outlook, with Wednesday’s report that euro-zone inflation accelerated to a new record strengthening their position. And while the Bank of Ireland, Permanent TSB and AIB held back from raising their floating rates after the ECB hiked rates in July, they are unlikely to absorb another hike.
“If there’s a rate hike next week, that could just be the trigger for the top three lenders to trigger their own rate hikes,” Hiney says.
If you’re one of the approximately 240,000 Tracker primary home mortgage holders and have a €200,000 mortgage with 25 years remaining and a margin of 1 percent over the ECB rate, you’ll automatically see your interest rate of 1, 5 percent to 2.25 percent if the ECB hikes rates by 75 basis points. Your monthly repayments would increase by €72.39 to €872.26, according to calculations by Joey Sheahan, head of loans at online broker MyMortgages.ie. Floating rate customers paying an interest rate of 3.15 percent would increase their monthly payments by €80.56 to €1,044.66.
Will I give up my tracker?
Trackers were offered during Celtic Tiger and withdrawn to new customers when the financial crisis hit. The interest rate you pay on your tracker is contractually tied to the ECB’s refinancing rate, and you typically pay the lender a margin on that refinancing rate. For years, the advice was to save your tracker for your life. But that advice is now more nuanced.
“We generally assume that trackers have a margin of 1 percent or less, but there are some margins that are higher,” says Sheahan. “Some are as high as 3pc. Anyone with a margin of 1 percent or less should probably just stick with the tracker, and someone with a margin of 1.5 percent or more should consider getting it repaired. In between it’s hard to name. If your tracker is 2 pieces or more, you are already paying more than you can fix before further price increases.”
Is it too late for a repair now?
Typically, it is best for borrowers with variable rates to choose a fixed rate when interest rates are rising, as ECB rate hikes drive up the cost of variable rates. Non-bank lender ICS increases its variable interest rate by 1.25 percentage points on October 1. ECB hikes also mean more expensive new fixed rates. So is it still worth repairing now? It depends, among other things, on the remaining term and the value of your mortgage.
“There can be savings because you can secure yourself for the life of your mortgage,” says Sheahan. “It will make sense for everyone to contact a broker and check their prices.”
Hiney says, “Even now the rates are still very low that customers lock up for 10 to 15 years because they don’t think rates will be that low again in the future.”
He points out that most people who took out a mortgage in the last five to seven years did so at a fixed rate, while variable rate mortgages tend to be older and often have smaller amounts outstanding.
My advice would be to look at your own lender’s interest rates first
“Take a variable-rate mortgage with $90,000 outstanding, where you’re paying 3 percent right now and the mortgage has 10 years left, with a monthly repayment of $869 per month,” he says. “If interest rates increased by one percentage point, the repayment amount would increase to €911, which is only an increase of €42. And remember, for the last eight years of a mortgage, you’re paying back the principal. When people do the sums on older floating rates, they imagine it’s going to cost me about €1,100 to switch.”
Switchers should also consider whether current delays in switching to a fixed plan reduce the amount of potential savings they could realize through the process.
Hiney says, “If you come to me today with your paperwork, we could apply to a lender within 48 hours. But if a lender takes six weeks to process an application and their own rate goes up on October 1, your application won’t arrive in time to claim the existing rate. There could still be two weeks left for the legal work. And remember that it is not the rate applicable on the day you apply, but the rate on the day you draw your funds.
“My advice would be to look at your own lender’s interest rates first. Some are offering new business plans to existing customers. Even with Ulster Bank and KBC exiting the market, there is still a large number of customers migrating to BoI and AIB. For these clients, I would contact their existing lender to see what options are available and if they can break out of their current fixed rate and switch to a newer fixed rate.
“If you haven’t started the switching process yet, start now for clients from other institutions. There are good plans now that may not be available in two months.”
https://www.independent.ie/business/personal-finance/property-mortgages/interest-rates-are-on-the-rise-and-living-costs-are-surging-so-it-is-worth-looking-at-whether-switching-your-mortgage-could-save-you-money-41956139.html Interest rates are rising and the cost of living is rising, so it’s worth considering whether switching your mortgage could save you money