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Why are fixed rate mortgages on the rise?

An increasing number of mortgage borrowers are opting for fixed rates over variable rates, but are fixed rates the best option for house-hunters in the current low-interest environment?

The net value of fixed rate mortgage drawdowns has been steadily increasing since the beginning of 2015.

In fact, fixed rate loans made up 55% of new mortgage agreements in the three months to January, but are they the best option for prospective buyers at the moment?

What is a fixed rate mortgage?

A fixed rate mortgage is a home loan that has the same interest rate every year for an agreed period of time.

In Ireland, the maximum length of time for which an interest rate can be fixed is ten years, but in other EU countries, some rates can be fixed for the lifetime of a loan.

What are the advantages of a fixed rate mortgage?

Fixed rate mortgages bring certainty, and that can be worth a lot to many house-hunters.

Mortgage repayments tend to be the biggest monthly outgoing for most households and knowing exactly what you’re going to be paying every month can bring peace of mind and really help with budgeting.

What are the risks associated with fixed rate mortgages?

If you lock yourself into a fixed rate for say, ten years, there is a chance that floating variable rates will fall over that period of time, leaving you stuck paying more than you have to.

Another drawback of fixed rate mortgages is the fact that you may be hit with penalty fees if you want to increase your monthly repayments at any stage.

If you receive a lump sum and want to use it to knock a chunk off your mortgage in one go, you may be charged an “additional funding fee” for doing so. These fees don’t apply to variable rate holders though.

Similarly, you may be charged a breakage fee if you switch banks or switch to a variable rate with your existing bank.

Basically, if you’re committing to a fixed rate, it may only be worth it if you’re happy to stick to that rate for the agreed term.

What are the best fixed interest rates available?

Let’s say you’re a first-time buyer, looking to purchase a house for €300,000 and you have the 10% deposit (€30,000) the Central Bank requires you to have. You have a loan-to-value ratio of 90% and need a mortgage of €270,000.

Here's a table with the best 3-year fixed rates for first-time buyers with an LTV 90%, borrowing €270,000 over 30 years:

Ulster Bank

2.90%*

€1,123.82

€1,500 cashback

KBC

3.00%*

€1,138.33

25% off home insurance

EBS

3.00%

€1,138.33

2% cashback

Bank of Ireland

3.00%

€1,138.33

Up to 3% cashback

AIB

3.20%

€1,167.66

30% off home insurance

*Only available to current account holders

And here's a table with the best 10-year fixed rates for first-time buyers with an LTV 90%, borrowing €270,000:

Bank of Ireland

3.50%

€1,212.42

Up to 3% cashback

KBC

3.75%*

€1,250.41

25% off home insurance

*Only available to current account holders

How do the best fixed rates compare to the best variable rates?

To continue with our example of a first-time buyer with an LTV of 90% purchasing a house for €300,000; the best variable rate available for this type of mortgage is 3.15%, which is currently being offered by AIB and Haven.

Over a thirty-year term, your monthly repayment would be €1,160, but that rate could go up or down at any time.

With Bank of Ireland's ten-year 3.50% fixed rate, your monthly repayment would be €1,212 for the fixed term.

So, you would be paying an extra €52 every month on the fixed rate, which is an extra €624 over the course of a year, but you would have the peace of mind that your payments wouldn’t change. Well, for ten years at least.

The real question to ask yourself is: what value do you place on certainty and peace of mind?

Why are borrowers opting for fixed rate mortgages?

The Irish housing market has been through a remarkably volatile and unpredictable period, and many believe we're still years away from reliable stability. This could explain why more and more borrowers are opting for the certainty of fixed rate mortgages.

Another reason could have to do with how Irish banks have been reacting to the European Central Bank's interest rate.

The ECB's main rate now stands at 0.00%, but Irish banks have generally shown a reluctance to cut their standard variable rates in response (there have been some exceptions). This could cause borrowers to be skeptical about the possibility of a sudden slash in variable rates from Irish banks, and leave them favouring more expensive, but guaranteed, fixed rates.

To fix or to vary?

Taking out a mortgage can be a very stressful and nerve-wracking time. Choosing a fixed rate or a variable rate is one of a number key decisions you’ll make when buying a home and it’s important to have all of the information available before committing.

Irish property prices and global interest rate trends are notoriously difficult to predict, but by knowing the value you place on certainty and peace of mind, you will be in a good position to decide whether you should fix or vary your repayment rate.

You can compare fixed rates and variable rates on bonkers.ie now

Thinking of switching mortgage lenders to get a better rate? Check out this video:


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