Feeling the burden of mortgage rate increases

Well, it’s all coming thick and fast now on the subject of whether to fix your mortgage rate. Fiona Reddan of the Irish times wrote on 9th August, 2010:-

MORTGAGE HIKES: Homeowners with variable mortgages are facing a fresh round of mortgage-rate hikes as banks seek to offset losses elsewhere. And with possible ECB rises, those on trackers aren’t in a much better position. 

LIFE HAS JUST become a whole lot more expensive for a whole lot more homeowners as our banks – some of whom we, as taxpayers, have substantial stakes in – have started increasing mortgage rates in order to offset heavy losses which they have incurred as a result of some of the dubious lending practices they engaged in during the boom years.

The increases, of as much as 0.6 per cent, will add about €100 a month to a typical standard variable rate (SVR) mortgage, while further increases, in the form of possible rate rises by the European Central Bank, also loom large. When the ECB moves, even those on tracker rates will not be safe.

Given that about 85 per cent of homeowners in Ireland have variable-rate mortgages of some form, be it a tracker or a SVR, the rate rises will be felt keenly. While borrowers may bemoan the increases, there is little that can be done about it, as lenders are within their rights to change variable rates at their discretion. With international funding markets still proving to be very expensive for Irish banks, this cost, as well as the expenses incurred in servicing cheaper tracker mortgages, which are costing the banks money, are being passed on to variable rate borrowers.

For now, those who will be hit hardest are borrowers with SVR mortgages at Bank of Ireland (BOI) and its subsidiary ICS Building Society, the EBS Building Society and Permanent TSB. The EBS has increased its rate by 0.6 per cent, up from 3.23 per cent to 3.83 per cent, while Permanent TSB pushed its SVR up by 0.5 per cent to 4.19 per cent, making these products some of the most expensive on the market.

From tomorrow, Bank of Ireland will increase its rate by 0.45 per cent to 3.49 per cent, while ICS will push its rate up by 0.6 per cent to 3.64 per cent. So, for someone with a €300,000 mortgage over 30 years, the EBS rate hike will cost the borrower about €100 a month extra, pushing repayments up to €1,403, while at Permanent TSB, monthly repayments will rise by almost €90, up to €1,465, and at BOI, the increase will be of the order of €74, with repayments rising to €1,345.

While these rate increases are undoubtedly significant, the fact that they come on the back of a string of hikes over the past year – Permanent TSB customers, for example, have seen their variable rate mortgages rise by 1.5 per cent since last July – means that the cost of servicing an average mortgage has risen by as much as €3,000 a year for some.

And for variable rate borrowers with other banks, the fear now must be that, as was the case with the last round of rate hikes, lending institutions such as AIB will soon follow suit by ratcheting up their own rates.

While those on trackers will be saved from the latest round of rate hikes, there is now a very real possibility that those enjoying the benefits of historically low interest rates will find that times are changing. Although it is seen as unlikely that the European Central Bank (ECB) will look to increase its rate of just 1 per cent anytime this year, some commentators have suggested that rate hikes of as much as 1.75 per cent may be on the agenda for 2011.

However, Austin Hughes, chief economist with KBC Bank, is of the view that low interest rates are here for “some significant time to come”, and he doesn’t expect to see any change in ECB policy until the end of 2011 at the earliest. Indeed, he notes that financial markets are not pricing in a rate hike until the first quarter of 2012.

For Hughes, the major risk factor to such a scenario is if the global economy picks up sharper than expected, and if inflation begins to take hold. Otherwise, he maintains, it’s “steady as you go”.

However, when rate rises eventually do come, they may come at quite a pace for homeowners.

“Over a relatively short period of time, you could see repayments rise quite sharply,” says Hughes. As such, he urges borrowers to stress-test themselves now against “normal” ECB rates of about 3 to 4 per cent. Such a level would see an average tracker rate, of ECB+1 per cent, rise to about 5 per cent. So, for a homeowner with a mortgage of €300,000, an additional €500 a month would be needed to service their mortgage in such a scenario.

If interest rates do take off, those who fixed their mortgages some time ago – and lamented their decision at the time as rates were slashed soon after – may feel that it wasn’t such a bad decision after all.

And for those stuck with expensive SVR mortgages, there remains a little window of opportunity to move to a fixed product. Back in 2008, many borrowers locked into fixed rates of as much as 6 per cent, but now, a two-year fixed rate of 2.99 per cent is available from Irish Nationwide, while a five-year fixed rate of 3.8 per cent is available from Bank of Ireland for new customers.

Rachel Doyle, a director of PIBA Mortgage Services, is urging homeowners to review their rates, and to consider fixing at a good long-term rate. “Both variable and long-term fixed rates are on the rise, so delaying a decision may be costly,” she said.

However, for the thousands stuck in negative equity, or with loan-to-values (LTVs) of close to 100 per cent, such a move may not be an option, as banks are only offering their best rates to homeowners who owe considerably less than the current value of their home.

Irish Nationwide for example, will only lend to those with an LTV of 90 per cent on houses and 85 per cent on apartments, while its best three-year fixed rate of 3.15 per cent is only available for those with LTVs of less than 70 per cent.

So, if you’re unable to switch and are instead stuck with a bank which is intent on pushing up rates, what can you do? Well, with fixed rates also on the rise, options are limited.

At Permanent TSB for example, which now has a variable rate of more than 4 per cent, borrowers can look to switch to a two-year fixed rate of 5.25 per cent for existing customers, rising to 6.1 per cent for a 10-year fixed. Customers of BOI, which will soon have a variable rate of 3.49 per cent, can do a little better, and could consider switching to a fixed rate of 3.75 per cent for two years, a three-year fixed rate of 4.2 per cent, or 5 per cent for five years.

SVR INCREASES 

Bank of Ireland 

up 0.45 per cent to 3.49 per cent

ICS 

up 0.6 per cent to 3.64 per cent

EBS 

up 0.6 per cent, to 3.83 per cent

Permanent TSB 

up 0.5 per cent to 4.19 per cent

FIXED RATE OFFERS 

Irish Nationwide 

Two-year fixed rate of 2.99 per cent

Bank of Ireland 

Five-year fixed rate of 3.8 per cent

Comment: Interesting article but consumers should give their options some thought and take advice before doing anything, certainly if on a tracker rate. Say you consider fixing now for 3 years, with perhaps 15 years or more left on your mortgage term. If ECB takes a couple of years to rise say 2%, then locking into a 3 year fixed rate may not make any sense. Afterall, in 3 years time the consumer will not have the option of a tracker and at that time the lender variable rates may represent a considerable margin over the then ECB rate. Fixed rates for loyal clients are often higher than those available to new customers, so that may not be attractive in 3 years time either. If the lenders have fat margins on their variable rates, is it likely that the future fixed rates will be attractive? I don’t think so!

So Good Financial Housekeeping suggests that fixing is perhaps something to consider for a term of at least 5 years. The same arguements apply as before, but at least 5 years is a significant period of time. Again the suggestion is to seek proper advice, preferably from someone with appropriate experience who is not attached to one particular bank.    

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