Following a spate of mortgage rate increase announcements from lenders in recent weeks, many mortgage holders have been left wondering if they should switch to a fixed rate for peace of mind.
After a period of ultra-low interest rates, the cost of credit is getting more expensive.
The European Central Bank (ECB) has raised interest rates from 0% to 2.50% since July and it’s expected that it will increase rates to 3% or more in 2023. And depending on how long inflation remains above the ECB's target it could hike rates even higher.
This means the cost of mortgages is going to get more expensive.
However, for the time being, the main lenders have been slow to pass on the ECB increases to their variable and fixed-rate customers.
Bank of Ireland (BOI) has only raised its fixed rates by 0.25 of a percentage point for its new customers. AIB has raised its fixed rates by 1 percentage point. And Permanent TSB (PTSB) has raised its fixed rates by 0.45 of a percentage point on average.
However as the ECB continues to hike its rates, it’s likely all three of the main lenders will have to increase their rates again over the coming months. Perhaps by over two percentage points.
That’s why most mortgage holders are being advised to lock into relatively cheap, fixed-rate loans while they're still available.
In this article we’ll discuss whether you should switch your mortgage to a fixed rate or not.
To switch or not to switch?
It’s important to remember that you don’t even have to switch lender in order to get a better deal. You can simply contact your existing lender and ask them about the rate options available to you. You won't have to submit any documents or get a solicitor involved. Quite often it’s simply a case of calling your bank, asking for a 'rate options letter' to be sent out, and then ticking a box on a form to be put onto a cheaper fixed rate.
Be aware though that the rates banks offer new customers, and which you’ll see on bonkers.ie and advertised in the media, are usually not the same rates that they’ll offer existing customers. The rates banks offer their existing customers are usually a bit higher, unfortunately.
That’s not to say you can’t save money with your existing lender. You absolutely can - and it's much quicker than switching lender. But you won't save as much as you could.
Whether you should switch will also depend on several factors...
1. The balance remaining on your mortgage
If you have only a few years left on your mortgage it may not be worth your while going through the process of switching. And as a general rule, if you have less than five years and/or €50,000 remaining on your loan, most lenders won’t accept the switch as they feel it won't be worth their time.
2. The type of mortgage you have
Whether you have a fixed-rate mortgage, a variable-rate mortgage or a tracker will affect your decision and we’ll go through these options below.
If you currently have a fixed-rate there may be a breakage fee for leaving your fixed rate early.
3. The rate you’re currently paying
The higher the rate you're now paying - the more you’ll benefit from switching.
As a very general rule, if you’re paying a rate of 4% or more you should definitely consider switching or asking your existing lender about the options available to you.
Fixed rates of between 2% and 3% are still widely available meaning you could save some big money and get peace of mind that your payments won’t increase for a fixed period.
However if you’re paying a rate of 2.50% or less, you have a good deal and it may not be worth your while to switch. And most banks don't offer rates below 2.50% to their existing customers.
4. Your financial circumstances
If your financial circumstances have changed for the worse since you originally took out your mortgage, you may have trouble switching. However, if this is the case, you can still switch to a better rate with your existing lender.
If you’re on a variable rate the chances are you’re overpaying and you should seriously consider locking into a lower fixed rate while you still can.
In most countries, variable rates are lower than fixed rates. However in Ireland, it has been the opposite case for the past several years. Though this is changing.
While fixed rates as low as 2.15% are still on offer in Ireland, many variable-rate customers are paying rates of close to 4% or more.
The good news is that if you’re on a variable rate you have the most flexibility when it comes to switching. Variable rates have no breakage fee so you are free to switch to another lender without incurring an extra cost (outside of a solicitor’s fee).
And of course, as outlined above, if you don’t want to switch lender you can just ask your existing lender about the fixed-rate options available to you.
For example, PTSB currently offers a seven-year fixed rate of 3.90% for those with 10% equity, 3.80% for those with 20% equity, and 3.65% for those with over 40% equity. These rates compare well to its standard variable rate which is 3.95% - and which may increase in the coming months as the ECB continues to hike its rates. And you’ll have peace of mind and certainty that your repayments won’t go up for another seven years regardless of what the ECB does.
Meanwhile, BOI still has a five-year fixed rate of 3% and a ten-year fixed rate of 3.50% for its existing customers. And if you have more than 40% equity in your home you can get an even lower rate. This compares well to its variable rates which range from 3.90% to 4.50% depending on how much equity is in your home.
If you’re on a tracker you have a more difficult task in deciding what to do.
The advice, always, until recently was: never give up your tracker!
But with the ECB hiking its rates, it’s no longer so clear cut.
If you move off your tracker you won’t be able to go back on it, so you need to tread carefully.
Whether it makes sense to switch will depend on the margin you’re paying and the amount you have left to pay. If you’re paying a margin of 1% or less, it will probably make sense to stick with your tracker. However if you’re paying a margin of 1.5% to 2%, it may not.
The ECB will likely hike rates to 3.0% when it next meets in February. This means you could soon be paying 4.50% or more. And rates are likely to go even higher later in 2023.
However fixed rates below this are still available for now.
Trackers stopped being sold around 2007. This means all tracker customers are at least 14 or 15 years into their mortgage. So the balance and term on your mortgage may not be big enough to warrant switching.
However, check the fixed-rate options available with your existing lender.
But before you do anything make sure you get good financial advice.
If you’re on a fixed rate your repayments obviously won’t change until you come to the end of your fixed-rate period. However depending on when this is, you could be faced with much higher interest rate choices when you come to re-fix.
Although fixed rates have become extremely popular in Ireland in recent years, they tend to be for short periods of time: three or five years. This means many mortgage holders will be coming to the end of their fixed rate within the next year or so. And they'll be facing a much higher interest rate landscape when they do.
If you look to leave a fixed rate early there may be a breakage fee. However if you only have one or two years remaining, the fee may be very small or even zero. In this case, leaving your current fixed rate early so that you can lock into another (longer-term) fixed rate while they're still low might be a good idea.
And again, you don't necessarily have to switch lender. Your existing lender may be able to offer you a cheaper rate at the stroke of a pen.
Again, get good, professional financial advice before making any decisions.
Helpful mortgage articles
If you're looking for more information about mortgages and interest rates, check out the following:
- Discover the differences between all mortgage rate types here.
- Read about the advantages and disadvantages of both variable and fixed-rate mortgages.
- Find out all you need to know about the mortgage process in our Quickstart Guide.
Find the best mortgage rate for you
With mortgage rates across Europe on the rise, switching to a new rate could save you thousands over the term of your mortgage. So why not see what you could save?
At bonkers.ie, our free mortgage comparison tool makes it easy for you to review the lowest rates available from Ireland's main lenders in seconds. If you find a rate that suits you, you can get in contact with our mortgage broker team who will help guide you through your switch. Our broker service is 100% free and digital, meaning there's no need for in-person meetings or paper documents.