Variable V Fixed

CALI

Hopefully I will be buying soon and am wondering if I should go with a fixed or variable mortgage. It looks like variable would be the best at the moment but could I fix it down the line if interest rates start to go up? Also I was thinking of a 30 year mortgage but people on this seem to be against that at the mo.... Thanks for any advice

The_Conductor

Interest rates are not going to get any lower- this has been stated several times in ECB press releases. The stated aim is to return rates to normality over the next 3-4 years (they are currently @ 1%- normality is between 4 and 5%). You *need* to factor an additional 4% into your calculations-this is not scaremongering- its a simple reflection of where things are at. Most fixed rates have already been increased in reflection of this- and RBS/Halifax are under instruction to wind down their Irish operations and repatriate their Irish assets to the UK.

Personally I don't think it makes sense to buy at the moment- but if I was buying- it makes perfect sense to shop around and get the longest term, best priced, fixed rate product I could find. The norm on the continent is fixed rate products for the entire term of the mortgage- normally of ~5-5.5% (depending on circumstances). This is why mortgage debt of EU banks is viewed as investment grade debt, and often a core component of pension annuities- while Irish or US debt- is viewed akin to toxic sludge.

ACC nailed another developer yesterday (the second in 10 days), it looks like BOI and AIB aren't going to hang around for NAMA. The idea of NAMA was to prevent a massive overhang of assets hitting the market all at once- and crucifying values. This now looks like wishful thinking. Its likely that any recovery in Irish prices will occur in the medium term (15-20 years)- if you accept this- and can see yourself living in the same property for this timescale or longer- and negative equity is not on your mind- by all means buy. There are too many fundamental insecurities in the Irish market at present to actively recommend it as a course of action though.

The_Conductor

Ps- whats wrong with a 30 year mortgage?
It does make sense to stress test repayments @ 4% above current levels- and once you are happy with the repayments at this level- to use this to determine the length of the mortgage. Once you have done this- it also makes sense to overpay at the outset- to reduce the principle- this can mitigate interest rate increases down the road (and can either reduce the term of the mortgage- or give you a cushion with lower payments, when rates increase again).

irlrobins

You'll get a spread of opinions on whether to fix or not.

My personal opinion is that if you can get a good fixed rate of around 3.5% for 3 to 5 years then it might be worth it as it looks like interest rates will rise in the very near future as banks seek to maintain or increase their margins. These rates will rise independent of the ECB rate.

As you say you can go variable now and move to fixed at a later date, but you have to be sure that you don't leave too late or the fixed rates available now (at their lowest point) will rise too.

D3PO

irlrobins wrote: »

My personal opinion is that if you can get a good fixed rate of around 3.5% for 3 to 5 years then it might be worth it .

your in dreamland if you think you will find a 3.5% fixed rate mortgage for a 3-5 year term !!

Moonbeam

You can do both,say half fixed and half variable or another percentage.

irlrobins

D3PO wrote: »

your in dreamland if you think you will find a 3.5% fixed rate mortgage for a 3-5 year term !!

AIB current rates:

3 Year Fixed 3.19%
4 Year Fixed 3.57%
5 Year Fixed 3.86%

Like I said "around 3.5%", I didn't say exactly 3.5%.

Taking the three year rate of 3.19%. The lowest variable rate (assuming LTV > 80%) is 2.65%. So an raise in interest rate of 0.5% would mean the variable is almost the same as the fixed.

The_Conductor

Moonbeam wrote: »

You can do both,say half fixed and half variable or another percentage.

Why?
Interest rates are going up. We know they are going to increase ~4%. We know that the intended timescale on this is Q2/Q3 2010. Why only fix half if you get a reasonable rate? There is no upside on only going halves. The likelyhood of reductions is incredibly remote- its at 1%- which is considered to be negative in real terms by the ECB economists.

belmulletman

I'm confused as to why you are insistent that rates will go back to "normality" of 4% ecb rate. At their PEAK, rates were 6-7% here in Ireland, that's 4% above where they are right now, and that was by no means normal! That was at the height of the "boom".

Where have you seen / read this?

Ste.phen

He said increase 4%, not increase to 4%, an increase on the current rates of 3-4% would be 7-8%

belmulletman

Ste.phen wrote: »

He said increase 4%, not increase to 4%, an increase on the current rates of 3-4% would be 7-8%

I know... I said "of" 4%.
My point was, I don't think that an increase of 4% above what the Irish lenders are offering now is "Normal". It was way above normal at the peak of the "boom". So just wondering what info is out there, that we don't know of, lends someone to believe that rates will theoretically go to in or about 7%. Sure that would just F up a recovering economy / economy trying to recover (as we know recovery will take YEARS and and YEARS!)

The_Conductor

belmulletman wrote: »

I know... I said "of" 4%.
My point was, I don't think that an increase of 4% above what the Irish lenders are offering now is "Normal". It was way above normal at the peak of the "boom". So just wondering what info is out there, that we don't know of, lends someone to believe that rates will theoretically go to in or about 7%. Sure that would just F up a recovering economy / economy trying to recover (as we know recovery will take YEARS and and YEARS!)

The ECB considers normalisation of interest rates to be around 4-4.5%. This is 3-3.5% above current base rates (of 1%).

The Irish economic conditions are pretty much irrelevant- what is relevant are the economic conditions in Germany, France and to a lesser extent Italy.

The ECB had abnormally low interest rates for much of the last decade- which was wholly unsuitable to the stage in the economic cycle Ireland, Portugal, Spain, Italy, Greece, The Netherlands and some other Eurozone countries were in. However it was appropriate for France and Germany.

If you really think that Ireland being up the creek without a paddle is going to influence them increasing or delaying their increase in interest rates one little bit- unfortunately you're mistaken.

Senna

I think what the ECB does over the next few years wont be as big an issue as the banks themselves raising their margins. Because of the gov guarantees, there is pressure on them to keep interest rates low, this will continue for a while, but its only a mater of time before the gov has to give in, at the moment the banks are zombies, with very little money coming in compared to the money they are having to right off against bad debts.
When they can increase their margins, they will need less intervention for the state, so its really only a mater of time. Look at the UK standard variables (article below) most UK banks have a SV around 5% even though the base rate is .5%, Irish SV are around 3% and a base rate of 1%. Irish banks want to do the same and i would suspect it will be before the ECB raises their base rate.

Observers Say Mortgage Rates Manipulated In UK
On July 9 Bank of England decided to maintain the the current interest rates at .05 level, but the borrowers are paying mortgage rates that are hovering around 8 percent. Now the British banks are accused of "mortgage rip-off" as the current rates are too high compared with the Bank of England interest rates.

http://www.huliq.com/1/83507/observers-say-mortgage-rates-ripped-uk

eman66

Would anybody have any comments on my situation?

FTB with, roughly speaking, gross figures of:

Variable, 2.65, 1100pm
5-year Fixed, 3.85, 1300pm
10-year Fixed, 4.65, 1400pm

A VR of 7% would be 1700pm.

I'm no good at the maths part, or the economics part, (but I'm brilliant at everythig else ). At what point would it become economical for me if I go with a fixed rate? The fall in interest rates was pretty spectacular, I would say. Would the rise be considerably slower?

The_Conductor

eman66 wrote: »

At what point would it become economical for me if I go with a fixed rate? The fall in interest rates was pretty spectacular, I would say. Would the rise be considerably slower?

In short- it would be more economical for you to be on a fixed than on a variable- when the fixed rate is less than the variable rate. How likely is that to happen- its like looking into a crystal ball- the ECB would have you believe that their 4 year target is to get base rates back to 'normality' (which they consider to be 4.5%). So within a 4 year window- it seems probable that the lending institutions will have variable rates of around 5.5-6%.

Its also possible that the government may instruct the financial institutions to offer mortgages like the rest of Europe (that is fixed rate mortgages for the term of the mortgage- possibly around the 5% mark). The benefit of these- is they are bundled and sold on to pension funds for annuity purposes- whereas Irish mortgages traditionally are not.

Your current predicament as to whether to lock and for how long- can be answered by asking yourself the question- how risk adverse are you? If you do not want to accept the risk associated with a rising rate- fix for as long as possible. A 10 year 4.6% rate- while expensive now- may seem very good value in 3-4 years time (and you can be certain it won't be available then).

Are you willing to accept that you may have to pay a higher rate? That is the knux of the issue.