What mortgage interest rate are you on?

What mortgage interest rate are you on?
The Clare Champion, 22/4/10 - Download PDF

With the current climate of interest rate hikes, NAMA, bail outs and so forth, now would be a good time to look at the options open to you in relation to your mortgage interest rate. Let's look at the different types of mortgage interest rates.

Variable interest rates go up and down over the life of the mortgage at the will of the lender. Typically they will increase in line with interest rates set by the European Central Bank (ECB), but lenders may not always pass on ECB rate cuts.  The current situation is notable because, while the ECB rate remains at a record low of just 1%, and is not expected to rise for some time; variable rates are nevertheless likely to rise further, thereby going against the overall interest-rate trend.  The reason for this is that the banks badly affected by the financial crisis have to find ways of making money and absorb ongoing losses. One way of doing so is by improving their margins on commonly used financial products such as mortgages.

In the last year, Permanent TSB increased its standard variable rate for existing customers by 1%. Because the other domestic institutions were reliant on the Government to get the National Asset Management Agency (Nama) up and running they did not follow the move of Permanent TSB immediately.

Given that NAMA is almost operational the banks are anxious to improve their margins and their rates are now slowly creeping up.  This will mostly affect first time buyers who have purchased in the last 18 months, when tracker mortgages were no longer available.

Once the banks have increased rates, they will be slow to bring them down again.

Fixed Interest Rates

When you fix the interest rate on your mortgage you are basically agreeing with the lender to pay this interest rate over the agreed period no matter what happens to rates in the meantime.

A fixed rate can help you through the initial period by offering you the security that your monthly repayments won‘t suddenly be increased due to a rise in interest rates. The disadvantage is, if rates remain low, you will have paid over the odds. Also, anyone who is on a fixed term may be hit by unexpected higher variable rates when the fixed term ends

Tracker Rates

The ideal mortgage to have right now is a tracker mortgage.  If you have a tracker mortgage it means that the interest rate on your mortgage is set at a fixed percentage or ‘a margin‘ above the European Central Bank (ECB) rate. For example, it could be set at the ECB rate plus 1%. Therefore, if the ECB rate rises by 1%. So does your rate. It automatically ‘tracks’ the ECB rate.

One of the reasons that variable rates are increasing is because of the losses being incurred by lenders on Tracker Rates. Some banks are encouraging customers away from Tracker rates by offering competitive fixed rates. However, be aware, if you switch from a Tracker Rate to a fixed rate mortgage, your repayments may not increase but you will lose your tracker rate.  Only you can decide what is best for your individual circumstances. However, before you decide you should consider the following:

• Hold on to the benefit of the link to the ECB rate as Tracker Mortgages are no longer available.
• Weigh up the short-term effects against the long-term costs.
• Do make sure that you can afford to meet your monthly payments, particularly if interest rates were to increase. Look at the cost of your mortgage over the life-time of the loan and see what effect an increase in repayments would have on your budget.)

Seek independent advice
If you are still unsure about what to do with your mortgage, don‘t be afraid to get more information on your options. At the end of the day it is your money.
Ask your local independent advisor, your bank, or feel free to give us a call here at Carey Corbett Financial Solution on 065 6893540.