Where is the mortgage market heading?

Should I fix or not? The Sunday Times Article

Humans typically suffer from something called “status quo bias”. Basically this means we love routine and are often opposed to change.  The problem with Mortgages is this doesn’t work very well unless of course you happen to be lucky enough to have one of the older style “tracker rate” mortgages.  Inertia can costs tens of thousands of euro to the average couple over the lifetime of their mortgage.  A big reason for this is that Ireland has one of the highest interest rates in all of Europe, running at an average of 2.79% per annum. This is more than double that compared to the main countries of France and Germany, which are at around 1.15%.  Denmark’s is currently at an astonishingly zero percent!  To put this in perspective, if you have a Mortgage of €300,000 at an interest rate of 3% with 25 years remaining you will be paying the bank €126,790 interest on top of the €300,000 loan. The monthly repayments would be around €1,422. By contrast if your rate was 2.1%, your interest cost would fall to €85,866 with monthly repayments of around €1,286. This is a whopping €136 per month less or 10%.  This is enough to fund about one and a half children through all of their college education needs.

Two institutions at present, namely Avant and AIB, offer the lower 2.1% rate albeit subject to certain loan to value ratios (LTV).  The LTV is the amount of the loan as a percentage of the value of the property. To avail of these rates, the LTV it has to be between 50%-80% depending on the lenders criteria. Avant really opened the market but are a little stringent when lending money.  For example you have to live near a bigger city and in the same employment for more than 2 years.  For many first time buyers they won’t be able typically to get these rates but 2.25% per annum with cash back is becoming more and more common.  A lot of people question whether cash bank is a good deal and really the answer is that it is if the rate of interest is not jeopardised.  What I mean is that if you are say offered 3% cash back , €6,000 on a €200,000 mortgage but at a rate of 2.5% versus a straight 2.25%, then you need to see the calculations to the difference it makes over the lifetime of the mortgage. Generally the lower rate will win out.  Some individuals chase lower rates with cash back deals and I came across a client recently who was in his third mortgage in 5 years having got 2 cash back deals in that time.  It is possible but takes a bit of work and effort and the reason why more people don’t do this is due to the bias mentioned earlier and that getting a mortgage can be stressful.

The main problem a lot of people have is they don’t know what their mortgage rate is so don’t really have a starting point to what they should be getting, let alone where the mortgage market is heading. The truth is that nobody can be certain exactly whether rates are going to fall or rise and at some point both will occur. As well as this the environment is so changeable.  I was recommending to clients up until the pandemic to stay on a low variable rate or short term fixed rate.  This was because rates looked likely to fall due to pressure of competition from the likes of Avant and from banks across the Irish Sea.  It seems however now the reverse is likely to occur. The recent announcements of KBC and Ulster Bank to leave the mortgage market and the fear of increasing interest rates are likely to cause upward pressure.

Another thing to bear in mind is that owner occupiers, whether they are first time buyers or not are in a much better positon than those renting properties.  Interest rates for those renting are more in the region of 3.5%-4.5% per annum. 

The main takeaway is that you should be proactive in this space whether you are looking to buy a property or looking to reduce the cost of your current one.  Sometimes braking a fixed rate mortgage can be financially beneficial but again information is power and finding out the breakage cost from your bank is the starting point.  If you are on a rate of 2.25% p.a. then is it unlikely to be worthwhile but anything over 3% then it really is something to seriously consider.  Whether or not you should use a mortgage broker or go it yourself is some part down to the complexity of what you are doing and how informed you are.  The more complex, say buying and selling then it might be worthwhile but always check fees before embarking on this.  The key thing is to make sure you have the relevant information on what rate you are on, what rate you could be on and bridge the gap.  Sometimes time is a healer, insofar of coming of a fixed rate and making a change then but if it was me, I would see if a quality for a 2.1% mortgage and work backwards from there.”

Nick Charalambous is an independent Qualified Advisor with Alpha Wealth.

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