Michael Dowling: Benefits of fixing your mortgage for the very long term

Michael Dowling, managing director of Dowling Financial writes that his advice for first-time buyers is to take out long-term fixed rates for 20 years or more.

There is something of a revolution going on in the mortgage market in the last two months that will have a significant impact for borrowers searching for long-term value.

I am talking about the long-term fixed rates offered by Avant Money and Finance Ireland, which mean that Irish mortgage holders finally have loan products that satisfy the demand for certainty and flexibility.

Long-term commitment

A mortgage is a long-term commitment, but Irish customers have not had the certainty of fixed-term loans when compared to the rest of Europe or the US. 

Back in 2014, only 10% of mortgage borrowers had fixed rates, for very good reasons: Banks only offered a five-year fixed rate as a maximum, and a customer could face savage penalties under certain circumstances.  

By this year, the vast majority of mortgage holders had moved to fixed-rate loans, although many went for a three-year fixed-rate loan, even though 10-year fixed rates were introduced by three lenders. This revolution only happened in recent months. 

Fixed rates for 20 years

Finance Ireland introduced fixed rates up to 20 years, and Avant Money offered fixed-rate loans of up to 30 years. The loans are at rates below 3% and are flexible. Their unique features include lenders allowing borrowers to pay up to 10% of the loan balance each year during the fixed term without penalty. 

In other words, from the start, the borrower knows the amount of the penalty should the fortunate position arise that the mortgage can be paid off in full before the term expires.

For example, a first-time buyer can borrow 90% of the purchase price of the property at a fixed rate of 2.99% for 20 years.

If in five years' time the loan-to-value ratio falls to 80%, the fixed interest rate falls to 2.9% and, if in 10 years, the loan-to-value ratio falls to 60%, the fixed interest rate falls to 2.6%. 

Falling rates

Interest rates will likely rise in the coming years as the next move in interest rates is upwards. 

I am not suggesting that interest rates will rise this year, but they will increase in the next two to three years. That means that borrowers currently on short-term fixed rates are likely to face higher rates when their three-year fixed rates expire. 

My advice for first-time buyers is to take out long-term fixed rates for 20 years or more. 

Fixed for 20 years, Avant Money and Finance Ireland offer loans at below 3%, which are lower than the rates of the traditional lenders. 

However, Bank of Ireland, Permanent TSB, and AIB-subsidiary EBS offer cash-back incentives, although customers really want long-term value and flexibility, in my opinion.

Challenge for banks

The challenge for the traditional banks is whether they can afford to offer mortgages at 1.95% fixed for three to five years — as Avant and new player ICS Mortgages are doing — or offer long-term rates at below 3%, as provided by Avant and Finance Ireland.

The Central Bank is reviewing its mortgage lending rules. The introduction of long-term fixed rates gives it the opportunity to allow mortgage holders to borrow more, based on net income, and not the harsh multiple of gross salary. 

The inherent risk of lending remains: How will borrowers cope when interest rates rise. With long-term fixed rates, the risk is all but eliminated.

As the prudential supervisor of banks, long-term fixed rates with the flexibilities built into the product would make banks and customers less vulnerable to interest rate shocks. 

• Michael Dowling is a leading mortgage broker ([e-mail])