VARIABLE OR FIXED MORTGAGE RATES - WHICH TO CHOOSE?



Its tough enough finding your right property and even tougher getting a mortgage in the current climate but then to put the hat on it you often have to choose what lending rate is best with the key decision one between fixed and variable rates. Both have their attractions and pitfalls so here is a quick summary:

Fixed Rates
Positives
  • You know exactly what rate you are on and what your repayments are and neither change no matter how good or bad the economic climate becomes.
  • If interest rates rise you do not need to worry as your rate does not change.
  • You can lock in at a suitable rate for various timeframes from 1 to 5 years and sometimes longer depending on the lender.
  • At the end of the fixed rate period, you have the option of moving to a variable rate or choosing a new fixed rate term.
Negatives
  • If interest rates fall you may be locked into a fixed rate that is unattractive compared to prevailing variable or new fixed rates.
  • If you want to switch from a fixed rate to a variable rate you will have to pay a penalty which can be significant.
  • It is hard to get rates longer than 5 years.
  • if you have a fixed rate mortgage, you may be charged a penalty if you want to pay extra money off your mortgage.
Be very careful if you choose to convert a loan from a Tracker rate to a fixed interest rate because at the end of the Fixed rate period - you will only have the option of moving to a variable rate or choosing a new Fixed rate term. The original Tracker rate will not be available.

Variable Rates
 Positives
  • You can lock into an attractive rate particularly when interest rates are low.
  • You can have a rate for a definite period or not as the case may be.
  • If you want to switch to a better fixed rate you can do so with no penalty.
  • Variable rates give you the flexibility to make early repayments or lump sum repayments and so reduce the overall cost of your mortgage.
Negatives
  • Variable rates are as they say on the tin i.e. they will fluctuate.
  • If interest rates rise so will variable rates.
  • Lenders also have discretion in raising rates at any time regardless of interest rate environment as Irish borrowers know to their cost. For example both AIB and Permanent TSB have done it a number of times to try and recoup the margins that they blew a hole through via bad lending and unsustainable tracker mortgages.
  • Maximum timeframe it is possible to tie in with a variable rate is typically a year and this is where lender tends to offer a suitable discounted rate to attract new homeowners or similar.
Stay or Go?
After you have digested the above the key question still remains, if you are one of the lucky ones to have a mortgage approval letter in your mitts ..To misquote a Clash epic song ..’should I stay (variable) or go (fixed)?’

It all depends on your circumstances but our preference is for fixed as interest rates are very low and will stay low for some time but they invariably move upwards before people ( and experts!) think they will. Interestingly government bond ( also known as gilts) yields which are effectively longer term interest rates are starting to tick upwards in certain parts of the world recently which indicates the interest rate cycle may well have started turning globally. For example on 30th April the yield on 10 year UK gilts or government bonds was 1.66%. Today (11th June) it is 2.14%.

The Local Picture
The second catalyst for our preference for fixed is very much locally biased and it is simply that the loss making Irish banks will continue to raise variable rates regardless as the poor variable rate mortgage holders are forced to bear the price of the sins of their lenders. In short therefore we would recommend mortgage holders fix for as long as they can as really with mortgage rates now the only way is up. …..

This contrasts with low.ie and our mortgage protection premiums where we continue to keep them as low as possible for Irish consumers by stripping out a large chunk of the commission.