Thousands facing mortgage bill hike as fixed terms end
While tracker and variable mortgage customers have borne the brunt of the European Central Bank’s interest rate raising programme, those who managed to fix at the right time have remained largely insulated from its historically high interest rates.
According to the Central Bank, Irish banks’ fixed mortgage customer were enjoying an average interest rate of 2.95% at the end of 2023.
Those with non-bank lenders were doing even better, with an average rate of just 2.57%. Both compare favourably to the ECB’s current deposit rate of 4%.
But, for many, that enviable position will soon come to an end.
Finite Fix
Analysis published by the Central Bank early last year suggested that roughly 140,000 mortgage customers had fixed rates that would expire by the end of 2024. It’s likely half of those will complete their fixed term this year alone.
Those affected should have significant warning of what’s to come.
Banking and Payments Federation Ireland says banks here have a “robust communications process” for those leaving a fixed term, which includes giving them at least 60 days notice of its expiry.
Customers should also be given details of the new variable rate they will default onto, and the other rates that might be available to them instead.
Banks are also required to give an indication of what those rates would really mean in respect of their monthly repayments.
And it’s here that they will almost certainly face the disturbing prospect of a significantly higher mortgage bill.
Because data published by the Central Bank last week showed that the average mortgage interest rate being offered by banks at the end of 2023 was close to 4.2%.
In real terms that could represent thousands of euro more in costs each year.
Taking a customer with a €250,000 mortgage over 30 years as an example; a 2.95% interest rate would see them repaying €1,047.28 a month.
If that rate increases to 4.19%, the repayment would become €1,221.08 a month – or €2,085.64 extra per year.
For a non-bank customer, a rate change from 2.57% to the average of 4.19% would represent a near-€2,690 per year increase in repayments.
But some of those customers would actually face a far bigger shock. That’s because non-bank lenders are tending to offer far higher variable rate than banks at the moment – with an average of 6.09% compared to banks’ 4.07%.
In that case, the above example would see repayments balloon from €997 per month to €1,513 – almost €6,200 extra per year.
Customers that are facing an abnormally large spike in costs are generally wise to shop around.
That is the advice of BPFI, which encourages those ending their fixed term to speak to other banks, as well as mortgage brokers, to see if better rates are available elsewhere.
But even if they are, they may not be something these customers can avail of.
Stressed Out
Customers looking to switch their mortgage to a new lender are essentially treated like new mortgage applicants, which means their finances are scrutinised to ensure they can meet their new repayments.
As a result any new expenses they’ve taken on since their mortgage drawdown – like a personal loan – or any new financial obligation – like children – will take away from their repayment capacity in the eyes of the bank.
The fact that they are older may also have a bearing, as it could limit the term of loan a bank is willing to give, forcing higher monthly repayments as a result.
With banks’ stress tests added on top of this, it could mean that other lenders are unwilling to take on the risk of the loan – even if it’s one that the customer has had no problem repaying up until that point.
Tricky timing
Another factor limiting borrowers’ options at the moment is the uncertainty that surrounds interest rates.
It’s generally accepted that the ECB has finished increasing rates.
It has been at pains to say that cuts are not yet on the table – but markets still anticipate rates would begin to fall in the late spring or early summer.
As a result, many would be understandably reluctant to sign up to a new fixed term at what is likely to be a high-water mark.
But waiting it out on a variable has its risks, too.
With some lenders the variable rate is currently higher than their fixed offerings, meaning there is at least a short-term price to that option.
And while the ECB has finished raising its rates, it’s not guaranteed that Irish banks have. There is always a chance that variable rates could be vulnerable to further price hikes.
And even when the ECB does begin to make cuts, the only customers absolutely guaranteed to benefit immediately will be those on trackers.
Irish banks took their time when raising rates over the past two years; and they have repeatedly pointed out that they have so far only passed some of the ECB’s increases on to fixed and variable customers.
As a result there is every chance they will be just as slow to pass on some of the ECB cuts that are to come, initially at least.
Best of a bad situation
But that’s not to say that end-of-fixed-termers are completely helpless.
While it’s unlikely they will be able to entirely avoid the bill shock of a higher interest rate, there are some ways they can at least soften the blow.
Banks tend to offer more attractive rates to mortgages with a lower loan to value ratio – as they are seen to be less risky for the lender. For most, their loan-to-value ratio will have improved significantly without them having done anything.
Average property prices nationally have risen by more than 27% in the past three years alone, according to Central Statistics Office data.
Those who have made upgrades or improvements to their home in that time may well be sitting on an even better uptick in their home value.
Getting a lender to recognise this change may require a visit from an approved, independent valuer – which could cost anything from €250 to €500. However, that cost would likely be recouped quickly.
At the moment AIB is offering a rate of 4.15% on variable mortgages with a loan to value of more than 80%.
Where the loan to value is below 50%, the rate drops to 3.75%.
On a €250,000 mortgage over 30 years, that represents a monthly saving of €57 – or around €690 a year.
Those that have made their homes more sustainable may also qualify for a lower interest rate through ‘green’ mortgage offers.
These tend to apply to homes with an energy rating of B3 or higher and, much like with a revaluation, banks will likely require an official assessment to confirm that is the case.
However the potential savings are significant.
At present AIB is offering a five year green rate of 3.85% on properties with a loan-to-value of more than 80%. That compares to a 5% rate for its standard five year fixed.
That represents a €2,040 annual difference on a 30 year mortgage of €250,000.
An equivalent loan at PTSB comes with a rate of 4.3% – compared to 5% for its non-green equivalent.
Meanwhile, Bank of Ireland offers a rate of 3.95% – with its regular fixed having a 4.25% rate applied.
The reality is that the savings the green loan offers is probably not quite big enough to justify the cost of a major retrofit in itself. However it does represent a significant side benefit for those who have already undertaken one, or are planning to so in the near future.
Article Source – Thousands facing mortgage bill hike as fixed terms end – RTE
