Fixed Term or Variable?

denashpot · 14-03-2010 11:34pm #1

Hi,

Im on variable at the mo, my interest rate is 2.25 percent.

Im was worried the interest rate might rise soon so I inquired with my mortgage lender about 2 and 3 fixed term rates. They sent me a letter offering me the 2 and 3 fixed term at a rate of 3.99 percent. Basically I be paying 220 euro extra a month.

Im just wondering is it still worth staying on the variable?

Im clueless at this so I appreciate any help and advice.

Thanks,

Pat.

D3PO · 15-03-2010 2:43pm

as ive said many times on this forum. Dont go fixed unless you are concerned with your budgeting and need to lock in a price to ensure you can get by month to month.

Fixed rates are not a gamble on the banks behalf, they ensure they set the rate at a level that gives them more than enough buffer over the term of the fixed rate verus the margin on a variable.

if you take that fixed rate I am positive you will pay far more over the term than if you stayed variable

OMD · 15-03-2010 2:56pm

In the good old days D3POs comments would be correct. Now I believe they are not. You are on a variable rate of 2.25% which is extraordinarily good. If interest rates do not rise for next 12 months you can still be assured that your variable rate will rise. Banks have to increase their profits. Is your mortgage with AIB? If so they will definitely increase the variable rates very soon and have said as much in recent weeks. Add to that a 1% rate increase in next 12 months and almost certainly by this time next year your variable rate will be near 4%. I would be tempted to fix but there are better 2 and 3 year fixed rates out there as long as you are not in negative equity and can persuade someone to allow you to switch mortgage.

D3PO · 15-03-2010 3:31pm

OMD wrote: »

In the good old days D3POs comments would be correct. Now I believe they are not. You are on a variable rate of 2.25% which is extraordinarily good. If interest rates do not rise for next 12 months you can still be assured that your variable rate will rise. Banks have to increase their profits. ge.

In the current days my comments are correct. I dont know why you trying to insinuate that banks that know they are increasing margin havent already priced this into their fixed rates ? You need to check the movement of each banks fixed rates and you will see thats not true.

It doesnt take a genius to work out that 3.99% fixed over 2 years is a terrible deal when a variable rate is at 2.25%

Assume 0.75% margin increase, still only brings you to 3% and of course that wont happen in one go. most likely margins increased a half point followed later by a quarter.

Its almost universially agreed that ECB rates wont move until Q1 next year. even if you assume a half point increase followed by another half point in Q2 your only up at the fied rate being offered.

even if you consider another half point in Q3 & Q4 its still better to have been on the variable rate and to consider half point rate rises ever quarte rnext year is beyond agressive.

Again I go back to my first comment. Banks dont set fixed rates to screw themselves, they insulate heavily against rate rises and to ensure it is better for them that the rate + margin would be on a variable.

Your being very nieve to think that banks do anything that risks their margin.

OMD · 15-03-2010 3:57pm

D3PO wrote: »

In the current days my comments are correct. I dont know why you trying to insinuate that banks that know they are increasing margin havent already priced this into their fixed rates ? You need to check the movement of each banks fixed rates and you will see thats not true.

It doesnt take a genius to work out that 3.99% fixed over 2 years is a terrible deal when a variable rate is at 2.25%

Assume 0.75% margin increase, still only brings you to 3% and of course that wont happen in one go. most likely margins increased a half point followed later by a quarter.

Its almost universially agreed that ECB rates wont move until Q1 next year. even if you assume a half point increase followed by another half point in Q2 your only up at the fied rate being offered.

even if you consider another half point in Q3 & Q4 its still better to have been on the variable rate and to consider half point rate rises ever quarte rnext year is beyond agressive.

Again I go back to my first comment. Banks dont set fixed rates to screw themselves, they insulate heavily against rate rises and to ensure it is better for them that the rate + margin would be on a variable.

Your being very nieve to think that banks do anything that risks their margin.

If you look at the UK where interest rates are currently 0.5% (compared to 1% here). The best variable rates there are substantially higher than here. That will not continue. Banks here need to increase their margins. Here is a link to best buy variable rate mortgages in UK.
http://moneyfacts.co.uk/compare/mortgages/variable-rate/

The rates are all over 3% unless you have a great LTV. That is 2.5% above the BoE rate. I see no reason why Irish Banks will not introduce similar margins or higher. If they do then the variable rate will increase to 3.5% even before the enevitable ECB rate rise.

D3PO · 15-03-2010 6:31pm

OMD wrote: »

If you look at the UK where interest rates are currently 0.5% (compared to 1% here). The best variable rates there are substantially higher than here. That will not continue. Banks here need to increase their margins. Here is a link to best buy variable rate mortgages in UK.
http://moneyfacts.co.uk/compare/mortgages/variable-rate/

The rates are all over 3% unless you have a great LTV. That is 2.5% above the BoE rate. I see no reason why Irish Banks will not introduce similar margins or higher. If they do then the variable rate will increase to 3.5% even before the enevitable ECB rate rise.

I tell you what if the OP's bank increases his/her variable by 1.25% before an ECB rate rises I will eat my hat.

Do you honestly think that a bank that is going to increase their margin to 3.5% on their variable in the next year is only going to set their 2 year fixed rate at 3.99%

Think about it .....

OMD · 16-03-2010 11:08am

D3PO wrote: »

I tell you what if the OP's bank increases his/her variable by 1.25% before an ECB rate rises I will eat my hat.

Do you honestly think that a bank that is going to increase their margin to 3.5% on their variable in the next year is only going to set their 2 year fixed rate at 3.99%

Think about it .....

As I said in my first post, I think she should change her mortgage to a different bank if she can as there are much better deals out there.

Considering you can get a 2 year fixed deal with a rate of 2.7% from BoI why do you think her bank are charging 1.3% higher than this? Perhaps because they are going to increase the margin on the variable rate by a similar amount.

Think about it........

Permanent TSB is already charging a variable rate of 3.69% which is 1.45% higher than OPs rate. If other banks do not increase their margins significantly in next year to follow suit I will be amazed

D3PO · 16-03-2010 11:18am

OMD not sure what economy your living in.

Switch mortgage lenders ? Even if we assume the OP isnt in negative equity and has an LTV attractive enough to switch do you think BOI would take the business.

We know for a fact AIB arent interested in this kind of thing and Id be pretty sure BOI are the same.

I gaurantee the OP that staying on their variable will work out cheaper over the next 2 years. So much so Id be willing to pay you the difference in 2 years time if Im wrong.

Thats how sure I am. You have yet to make any salient points indicating why a fixed rate deal would be better.

Answer me these

Do you agree that banks have already priced rate rises plus buffer into their fixed rates ?

Do you agree that banks have alreadly priced impending margin increases into their fixed rate products ?

Do you agree that its unlikely ECB rates will rise this year ?

If so and the answer should be yes to all 3 by the way. Please explain why a fixed rate would be better.

warrenaldo · 18-03-2010 12:53pm

I subscribed to this thread last week hoping it would help me decide between fixed and variable with my mortgage.

Im going variable. Everything D3PO has said seems correct - and makes a lot of sense.

Thanks.

OMD · 30-03-2010 3:30pm

D3PO wrote: »

I gaurantee the OP that staying on their variable will work out cheaper over the next 2 years. So much so Id be willing to pay you the difference in 2 years time if Im wrong.

I tell you what if the OP's bank increases his/her variable by 1.25% before an ECB rate rises I will eat my hat.

.

From todays Irish Independent
"Ireland's biggest bank will respond to its latest taxpayer bailout by raising mortgage rates by 1.5pc this year, the Irish Independent has learned.
Allied Irish Banks (AIB) is preparing to hit customers with two more interest rate hikes on top of the 0.5pc rise confirmed yesterday before the end of the year."

OMD · 23-07-2010 9:17pm

D3PO wrote: »

I tell you what if the OP's bank increases his/her variable by 1.25% before an ECB rate rises I will eat my hat.

Do you honestly think that a bank that is going to increase their margin to 3.5% on their variable in the next year is only going to set their 2 year fixed rate at 3.99%

Think about it .....

Well if OPs bank was EBS they have raised rates 1.2%. APR 3.9%. How does that hat taste?

Tigger · 25-07-2010 12:08pm

D3PO wrote: »

I gaurantee the OP that staying on their variable will work out cheaper over the next 2 years. So much so Id be willing to pay you the difference in 2 years time if Im wrong.

.

i thought this kind of statement went out with the bubble

D3PO · 26-07-2010 1:44pm

OMD wrote: »

Well if OPs bank was EBS they have raised rates 1.2%. APR 3.9%. How does that hat taste?

touche. but we all know from the rates posted that the OP's bank isnt EBS.

however id be interested in knowing what EBS's 3 year fixed was the month before they started to hike rates.

anybody know ?

Senna · 26-07-2010 2:54pm

I fixed in March with the EBS, 3yrs at 4%. It was a post by Smccarrick, I think, stating that the banks were borrowing at 5-7%, and margins would be rising a lot. At the time i figured a 1.5% rise would be on the cards and so the fixed rate would pay off fairly quickly.
By next year sub 4% interest rates will be a thing of the past, all banks are going to raise their margins and even if the ECB drops to 1% again in the future, their margins wont drop for decades.

D3PO · 26-07-2010 4:36pm

Senna wrote: »

I fixed in March with the EBS, 3yrs at 4%. It was a post by Smccarrick, I think, stating that the banks were borrowing at 5-7%, and margins would be rising a lot. At the time i figured a 1.5% rise would be on the cards and so the fixed rate would pay off fairly quickly.
By next year sub 4% interest rates will be a thing of the past, all banks are going to raise their margins and even if the ECB drops to 1% again in the future, their margins wont drop for decades.

cheers for that. That really surprises me. EBS really f**ked that one up, if they couldn't even forsee their own rate policy 4 months ahead of time.

Clearly there are still far too many incompetents in that bank. Doesn't bode well if that cant even forcast their own borrowing / margin rates for the short term.

irlrobins · 26-07-2010 5:21pm

I fixed last summer for three years at 3.1%. Current variable rate with my bank today, 2.99%. I reckon over the next 2 years my 3.1% will work out cheaper than variable rate over the same three years.

Yes ECB rates are low and don't look to increase soon or at any great rate. But we've already seen and will continue to see that the banks here will increase their variable rates before any movement in the ECB rate. Don't forget, they have to increase their margins to cover all the loss making tracker mortgages they have.

Now admitedly not all fixed rates are better than variable. I think you'd need to get a decent rate over 3 to 5 years, anything shorter would be unlikely to save you any money. Anything longer that 5 years is too hard to predict.

Senna · 26-07-2010 5:27pm

I've questioned the truth of the following statement before, but no-one has even been able to tell me if its right or wrong;
Banks buy "books" of fixed rates; ie, a bundle of loans (e.g. €100m worth) for 1,2,3,5or10yrs at a fixed rate, the bank adds on their margin and sells it, i.e they buy X amount at 2.5% for 3 years, then sells it to customers as a 3yr fixed at 4%.
The bank doesn't lose anything as they have placed their set margin on the loan, and the cost they pay back remains the same. In essence its a fixed rate loan for the bank also. This is why banks charge breakage fees to leave a fixed rate, as they themselves have entered into a fixed rate which they cant break, so they have to continue paying the loan at the fixed rate.

So banks set their fixed rates depending on what price they can buy these books, they may change their margins and so rates can vary in a short space of time, but banks dont lose out on fixed rates.

Tender Hoop · 27-07-2010 7:52pm

I fixed into a five year fix at 3.8% with AIB in march. Do you think I will save money over the five year period??

Senna · 27-07-2010 10:10pm

No-one can give you the right answer to that, but with margins rising and not likely to go down over your 5 yr term, i would say it will prove to be a very good decision.

The_Morrigan · 27-07-2010 10:53pm

Senna wrote: »

I've questioned the truth of the following statement before, but no-one has even been able to tell me if its right or wrong;
Banks buy "books" of fixed rates; ie, a bundle of loans (e.g. €100m worth) for 1,2,3,5or10yrs at a fixed rate, the bank adds on their margin and sells it, i.e they buy X amount at 2.5% for 3 years, then sells it to customers as a 3yr fixed at 4%.
The bank doesn't lose anything as they have placed their set margin on the loan, and the cost they pay back remains the same. In essence its a fixed rate loan for the bank also. This is why banks charge breakage fees to leave a fixed rate, as they themselves have entered into a fixed rate which they cant break, so they have to continue paying the loan at the fixed rate.

So banks set their fixed rates depending on what price they can buy these books, they may change their margins and so rates can vary in a short space of time, but banks dont lose out on fixed rates.

The problems started when the Irish banks were doing this before & during the boom where they would have bought say at 3%, sold onto the customer for 5% and then the likes of RBS, Ulster & Halifax who were global players, started to come in and undercut them when selling to the customers...so they started to try undercut each other and thats when they started to lose on their loans income wise. The lack of conservative lending criteria & stress testing that resulted in people defaulting, of course meant it comes off the bottom line if the debt has to be written off.
So now they are trying to recoup their losses.

I also suspect that the capital requirements they should have been holding as a percentage of the loan book, was eaten into when the price war started, and that's where all our money has now gone!!

Senna · 29-07-2010 1:13am

NiMhaoldearg wrote: »

... RBS, Ulster & Halifax who were global players, started to come in and undercut them when selling to the customers...so they started to try undercut each other and thats when they started to lose on their loans income wise.

My understanding is they are not losing on fixed rates, their margin may be lower than they would like, but they are not losing because the banks pays back a fixed amount for them. They are losing on SVR, as these are currently about 3-4% but most banks are borrowing at 5-6%.
Thats why the rates are rising, they also have to cover losses, but they aren't even marking profits on SVR's. If the banks had their way the SVR's would be up to 6% in the morning, the government wont let them do that, but they cant stop them raising it gradually over time.

D3PO · 07-12-2011 4:51pm

D3PO wrote: »

I gaurantee the OP that staying on their variable will work out cheaper over the next 2 years. So much so Id be willing to pay you the difference in 2 years time if Im wrong.

I know the bringing up of zombie threads is frowned upon but given we are nearly 2 years on and have another 2 ECB rate drops projected up to that 2 year period Id like to just point out that I wont be owing the OP any money

killers1 · 07-12-2011 6:52pm

The glaringly obvious thing to me about the initial question is that if you're rate is 2.25% you are most certainly on a tracker mortgage and not a standard variable rate as there is no lender out there offering SVR's that low at present and would be mad to look at fixing at this stage....

killers1 · 07-12-2011 6:53pm

ignore me I thought the original question was a recent one.... could still be on a tracker though

Fixed Term or Variable?

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