Fixed Rate Mortgage

stipey · 12-12-2006 11:10am #1

A close friend of mine has a fixed rate mortgage and she has just received the forms in the post to renew it.

She can choose between:

4.49% (4.8% APR) until 2008
4.75% (4.8% APR) until 2009
4.99% (5.0% APR) until 2011

She doesn't think a downturn in the economy is too far away and so is looking at the 3 or 5 year fixed term.

She has asked me for my opinion (because she somehow got it into her head that I have half a brain) but to be honest I haven't got a clue.

Anyway, if anybody would like to share your opinions on what they think might be a good choice from the above and what you think might happen to the economy (and by extension interest rates in the next 5 years) I'd be delighted to hear it.

I'm asking both out of my own personal curiosity and so I can pass your thoughs on. I realise that we are talking about an educated guess as opposed to a perfect science and I will keep that in mind (nobody will be sued - promise).

If this is in the wrong place, please feel free to move it somewhere else.

Time Magazine · 12-12-2006 2:43pm

Moving this to Investments & Markets. It fits in there slightly better than Economics, and you're more likely to get an answer

.

dublinli · 19-12-2006 5:40pm

first of all, it is not the the Irish economy that you should worry about in relation to interest rates, it is the EU as a whole. The only thing abouth the down turn in the Irish economy is that perhpas your friend can lose her job and will not be bale to pay mortgage but I suppose 3 or 5 year fixed or variable rates won't help in that sense any way.

My advice to people in relation to fixed rate mortgages is that if you can afford it comfortably go for a tracker rate but if you want the piece of mind and want to know waht you are going to pay in the next 3 years than go for a fixed rate. Also why not try 50 per cent fixed and 50 per cent tracker rates.

Don't forget that banks generally take the possible interest rate rises in the future into account when they adjust their long term rates. So it is very difficult for individuals to beat the bank in forecating what is going to happen with the economy
Hope it helps.

hmmm · 19-12-2006 9:07pm

Personally I don't understand why people take out short term fixed rate loans. Unless there's a major change in the economy, you're not going to see big interest rate changes over 2 or 3 years, so the chances are you will end up paying more for your fixed versus variable rate.

Over a 20 year lifetime of a mortgage however, things could change dramatically, so I can understand the reasoning behind the US and European 10 and 20 year fixed mortgage rates which we don't seem to be offered.

I'm not an expert but here's what I'd do if it was me - if I was anxious about being able to meet repayments over the next couple of years I'd fix for peace of mind. Otherwise I would only consider the longest period fixed I could find which would be your 2011 rate. Unless there is a major event (e.g. inflation begins to go out of control), my impression from listening to economists is not to expect more than 2% of a rise in interest rates over the next 2 years (but who knows)

sandoftime · 31-12-2006 11:33am

http://second-mortgage-tips.blogspot.com/

It might be useful.

Chunkychops · 08-01-2007 12:59pm

Hi There

I recently remortgaged through a broker to get a better rate. I too was wondering about going for a fixed rate. The broker got me the best rates in the market for 1, 2, 3 and 5 year fixed rates as follows:
1 year 4.09%
2 year 4.49%
3 year 4.65%
5 year 4.85%

In the end up I decided to go for a tracker rate.I got a 2 year discounted tracker for 3.95% but the rates I was quoted are better than those your friend got from their bank.
You could check out my broker at www.a2zmortgages.ie . I was very impressed with them - they got me free legal fees for switching my mortgage and they are very professional and explain everything in plain english. One of the guy's even came to my house to pick up the paperwork so I didn't even have to take time off work to sort things out.

Anyways hope your friend gets sorted.

Regards
CC

bullrunner · 24-01-2007 9:34pm

hmmm wrote:

Personally I don't understand why people take out short term fixed rate loans. Unless there's a major change in the economy, you're not going to see big interest rate changes over 2 or 3 years, so the chances are you will end up paying more for your fixed versus variable rate.

People (like myself) do it to know exactly what they have to repay for a fixed period of time..espec when rates are on the up (as they are now)

hmmm wrote:

Over a 20 year lifetime of a mortgage however, things could change dramatically, so I can understand the reasoning behind the US and European 10 and 20 year fixed mortgage rates which we don't seem to be offered.

I'm not an expert but here's what I'd do if it was me - if I was anxious about being able to meet repayments over the next couple of years I'd fix for peace of mind. Otherwise I would only consider the longest period fixed I could find which would be your 2011 rate. Unless there is a major event (e.g. inflation begins to go out of control), my impression from listening to economists is not to expect more than 2% of a rise in interest rates over the next 2 years (but who knows)

2% over the next 2 years is huge!! rates are 3.5% (it think!) at the moment..so 2% is about a 70% rise!!...if you fixed for 2 years you would know what you are going to pay for the next 2 years...plus save (based off your 2% ) money.

Personally i dont agree with your 2% figure...i'd be more looking at 0.75-1.25% rise over the next 2 years...but much of it depends on the german economy...which is going to take a bit of a hit again this year (due to inc vat rate ..went up 3% on jan 1st)...most germans did their big ticket purchases last year (ie tvs cars..etc) because they knew rates were on the up....so consequently spending on this stuff will drop!

hmmm · 25-01-2007 9:32am

bullrunner wrote:

2% over the next 2 years is huge!! rates are 3.5% (it think!) at the moment..so 2% is about a 70% rise!!

2% of the interest element of a mortgage (the dead money part). The futures market which determines the fixed rate you pay will already have priced in their expectations for interest rate rises, so unless there is a major unexpected change in interest rates in that fixed period they will make money and you will lose. Personally I think short term fixed rate offerings are a bit of a scam, long term fixed are not however.

bullrunner · 25-01-2007 1:24pm

hmmm wrote:

2% of the interest element of a mortgage

not quite sure what you are talking about here...can you elaborate a bit more??

hmmm wrote:

futures market which determines the fixed rate you pay will already have priced in their expectations for interest rate rises, so unless there is a major unexpected change in interest rates in that fixed period they will make money and you will lose

not quite true...the shorter the time horizon, the more likely the banks will get it right..but not always....eg BOE's recent unexpected rate rise.

the longer the time horizon the more scope there is for the unexepected...

hmmm · 25-01-2007 1:32pm

not quite sure what you are talking about here...can you elaborate a bit more??

On a normal mortgage, you are paying off interest and capital. The ECB rate increases only affect the interest element. So say you take out 200k of a mortgage at 4%, at the end of year 1 assuming you made no payments you'll own 208k. A 6% mortgage rate (a 50% increase) would see you owe 212k - it's not your entire mortgage that increases by 50%.

but not always....eg BOE's recent unexpected rate rise.

I agree, but who do you think is more likely to get it right in the short term - you or the financial professionals? If you fix for 2/3 years the chances are more than likely that you will just be giving the Merrill Lynchs of this world free money.

the longer the time horizon the more scope there is for the unexepected...

I agree again, which is why I think long term fixed rates are a good idea. 30 year fixed rates are common in other countries, we don't get them here which is a disappointment.

bullrunner · 25-01-2007 10:28pm

well..not to blow me own trumpet..but i fixed my mortgage back in august...rates have increased twice since then..with another one due early march and in june...fixed rate i got was 40bps above the average tracker (which was lower than the standard variable ) at the time...not exactly making money but paying less than if i had gone tracker/variable. Even if i had gotten a discounted 2 yr deal with someone i'd be still paying more now than the fixed rate i have.

all it takes is to look around and listen to what the market is saying. Trichet is determined to flag ALL rate rises prior to it happening (usually the month before hand).

kmick · 07-02-2007 12:18pm

hmmm wrote:

Personally I don't understand why people take out short term fixed rate loans. Unless there's a major change in the economy, you're not going to see big interest rate changes over 2 or 3 years, so the chances are you will end up paying more for your fixed versus variable rate.

Over a 20 year lifetime of a mortgage however, things could change dramatically, so I can understand the reasoning behind the US and European 10 and 20 year fixed mortgage rates which we don't seem to be offered.

I'm not an expert but here's what I'd do if it was me - if I was anxious about being able to meet repayments over the next couple of years I'd fix for peace of mind. Otherwise I would only consider the longest period fixed I could find which would be your 2011 rate. Unless there is a major event (e.g. inflation begins to go out of control), my impression from listening to economists is not to expect more than 2% of a rise in interest rates over the next 2 years (but who knows)

I fixed for 5 years at 4.44 in 2004 until 2009. The regular variable rate is around that now so your statement that you dont see big ineterest rate changes in 2-3 years is pants. Fixing allows you to budget for 5 years. You know what your payment is going to be. It does not matter whether it goes up or down after that. You have a peace of mind. Some people will pay more for peace of mind. I dont think a previously quoted figure of 4.85 for 5 years fixed is so bad. However some people are currently getting their tracker for under 4 so others may think it is rubbish.

Fixed Rate Mortgage

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