Michael Dowling: Mortgage borrowers should fix at truly long rates to beat ECB hikes

Most of us cannot hedge against rises in groceries, utilities, or fuel — but there is an opportunity to cushion ourselves against rising interest rates

There are 722,000 family home and 88,000 buy-to let mortgage holders facing a significant problem as interest rates are set to increase sometime this year. There are likely further rises coming in 2023.

The ECB sets the benchmark for interest rates and the ECB Base Rate, at zero, has not changed since March 2016. Interest rates are expected to rise by 0.25%, and incrementally, the increases are likely to amount to 1.5% over the next two years.

These increases will have an unwelcome impact on many households who are struggling with substantial increases in utility and transport bills. Inflation at 6.7% in March is the highest in 22 years. Some predict inflation of 8% in the coming months.

However, while people could not really cushion themselves against the inflationary impact of many goods, they have time to act to protect against future interest rate increases. Let us look at the impact of a 1% increase in interest rates on a mortgage of €250,000 over a 30-year term for tracker and variable rate customers.

Michael Dowling, managing director of Dowling Financial

There are 250,000 customers on tracker rates paying an average of 1%, which is the margin charged on the ECB Base Rate of 0%. An increase of 1% means that the current repayment of €804 a month rises to €924, an increase of €120 a month. This means that the tracker customer will pay an additional €43,000 in interest over the term of the loan.

There are currently 200,000 customers on variable rates paying an average of 3.75%. An increase of 1% means the current repayment of €1,158 a month rises to €1,304 a month, an increase of €146. This means that variable rate customers will pay an additional €53,000 in interest over the term of the loan.

There is a simple solution that requires borrowers to respond quickly and switch to a long-term fixed rate, or take a long-term fixed rate if buying a property currently. I would make the case for all borrowers, even people with trackers, to switch to long term fixed rates. To be clear, by long term, I mean a fixed loan of a minimum of 10 years and up to 30 years.

Borrowers have a short window to act

Almost all 10- to 30-year fixed rates, depending on loan to value ratios, are currently under 3%. Borrowers have a short window to act but the savings will likely be worthwhile.

The perceived wisdom is not to relinquish tracker rates. But what if rates rise by 1.5% in the next two years when the average tracker mortgage customer will be paying 2.5%? They will be paying this rate with no guarantee interest rates won’t move higher. I would argue all mortgage holders should consider locking their interest rate into a long-term option.

There have been several important changes in how long-term fi

xed rates operate in the market which makes them more attractive.

There are only two lenders which offer fixed rates from 10 to 30 years and are to be commended. They have tackled the issue by advising customers at the time of drawdown the penalty they will pay if fortunate enough to be able to repay their mortgage in full during the fixed term.

Compare your options now

Until October, borrowers with fixed rates did not know the penalty they would pay for breaking their fixed rates. This acted as a deterrent to borrowers taking out long-term fixed rates.

If you take a long-term fixed rate today, the penalty for repaying the loan in full, during the fixed term is as low as zero and a maximum of 2% in the case of one lender and 5% in the case of the other lender. The higher redemption penalties apply where the loan is repaid early in a long-term fixed rate period.

One lender offers a remarkable feature that gives customers the benefit of a lower fixed rate as the loan to value ratio reduces on the mortgage, based on the fixed rates that were available at the time of drawdown of their mortgage. Borrowers also have the facility to bring the current fixed rate when moving house.

There is a compelling case for all mortgage holders to compare the available options for fixed rates. They will unlikely be available in the next three months.

• Michael Dowling is head of Dowling Financial and a leading mortgage and debt adviser