Still value to be found by switching your mortgage despite rising interest rates

With energy bills at record levels and food inflation at close to 10%, the last thing households need is rising mortgage rates.

Last week, AIB became the first of the main pillar banks to raise interest rates adding 0.5% to its fixed-rate products. Bank of Ireland and Permanent TSB are expected to follow with similar increases.

Non-bank mortgage lender, Finance Ireland had already taken the extraordinary decision to raise its three and five-year fixed rates by a full 2% for new customers in response to the increases by the European Central Bank (ECB).

This means first-time buyers with a 10% deposit will now pay a rate of 5.95% if they choose the lender’s five-year rate.

Its variable rate for new and existing customers will also increase by 2% to between 4.75% and 5.15% depending on the size of your deposit or loan-to-value ratio.

According to Daragh Cassidy of Bonkers.ie, these increases will add around €300 a month to the average mortgage payment and are well in excess of the 1.25% hike which the ECB has so far announced. He points out that the vast majority of mortgage seekers will find better value elsewhere and suggests that Finance Ireland is practically closing for new business for the immediate future.

In raising rates, the company is following in the footsteps of other non-bank mortgage lenders.

Last month, ICS increased its three and five-year fixed rates by 0.50% across all loan-to-value (LTV) bands. This was the third increase this year, following similar moves in March and May. First-time buyers with a 10% deposit who want to avail of ICS’s five-year fixed rate will now pay a rate of 4.19% as opposed to 3.69% previously, and just 2.50% back in March.

“This means a first time-buyer borrowing €250,000 over 30 years will now pay €1,210 a month compared to €1,140 a month previously. At the start of the year they would have been paying just €984 a month,” says Mr Cassidy.

With energy bills at record levels and food inflation at close to 10%, the last thing households need is rising mortgage rates.

But with the ECB in tightening mode, the reality is that we’re all going to have to get used to higher rates.

Back in August, the other non-bank lender in the Irish market, Avant Money, announced its second rate increase of the year. They increased their three, four, five, seven and 10-year fixed rates for new borrowers by between 0.30% and 1% from August 15.

The expectation of further ECB rate rises is making funds dearer on global money markets. This in turn is putting pressure on non-bank lenders, who rely heavily on these markets for funding, to hike their rates.

By contrast, the main retail banks can partially fund their mortgages through their vast deposit books so are less exposed to rising costs on capital markets… for now.

Mr Cassidy says that despite these rises from the non-banking sector, there is still value to be had there.

“Finance Ireland’s longer-term fixed rates over 10 to 25 years will ‘only’ increase by between 1.49% to 1.58% depending on the term and the size of the deposit a mortgage seeker has. But these might still be worth a look given the increasing uncertainty over mortgage rates over the medium to long term. Indeed, all Finance Ireland’s longer-term fixed rates are now cheaper than its three and five-year rates. For example, if you have a 20% deposit you can get a 20-year fixed rate with Finance Ireland for 4.83%.”

The lender drew a lot of negative attention because when it first announced these hikes, it also said that if you had mortgage approval in place, you had to draw down the mortgage within five days to avail of the original, lower rates. After a backlash, this was extended to ten days.

AIB has said customers approved for a mortgage will have a month to drawdown and still avail of the older rate.

Looking forward, all eyes are now on Bank of Ireland and PTSB, which so far haven’t passed on any of the ECB rate hikes. However, with the ECB expected to increase rates again to 2% at the end of the month, it’s only a matter of time before the main banks also increase their rates.

In the past two years, fixed-rate mortgages have become increasingly popular among mortgage seekers. But it’s still worthwhile checking out the pros and cons of going with fixed or variable rates.

“Flexibility is definitely the greatest asset to a variable rate,” says Mr Cassidy. “You don’t need to worry about penalties if you want to increase your monthly mortgage repayment, pay off your mortgage early, or switch to another lender, and you could also benefit from falling ECB interest rates, if your lender responds to them.”

On the downside however, variable rates don’t offer stability or predictability, meaning you’re at the mercy of changing rates. Yes, your rate might go down over the term of your mortgage but it could just as easily go up, particularly in inflationary times, as we’re experiencing today.

“Rate changes are difficult to predict and a lot can happen over a 20- or 30-year mortgage term, so you could be putting yourself in a financially vulnerable position by choosing to go with a variable rate.”

The prime advantage of fixing is that it brings certainty. Mortgage repayments tend to be the biggest monthly outgoing for most households so knowing exactly what you’re going to be paying every month for a fixed period of time can bring peace of mind and really help with budgeting.

Be warned however.

“If you lock yourself into a fixed rate for say, 20 years, there is a chance that interest rates could fall over that time, leaving you stuck paying more than you otherwise would have. Another drawback of a fixed-rate mortgage is that you may be hit with penalty fees if you want to increase your monthly repayments at any stage.”

It’s possible of course to fix for a much shorter period; always think carefully before you act, and seek advice from an independent source.