Should I Switch My Mortgage?

19 October 2022

There is little doubt that the sudden and sharp rise in the cost of living has been a shock to many people across Ireland. The impact on our personal finances is evident at the checkout when we pay for food, on forecourts when we pay for fuel and when we get an energy bill. We are all trying to figure out how to survive the increased costs and get through the winter, but with interest rates also rising, it is crucial that households review their largest household bill – their mortgage. Is now the right time to fix the rate so your mortgage repayments are not also subject to increases?

Over the last few years, when interest rates have been at record lows, households haven’t bothered reviewing their mortgages and have remained with the same Bank as they did not see the savings were worth the hassle of switching. However, with the recent ECB rate increase and with further increases expected, homeowners are now in a rush to switch their mortgage or lock in a fixed rate before their banks pass on the ECB rate increases. With Ulster Bank and KBC departing the Irish market, it leaves households with less choice. The process to switch banks can now take months rather than weeks to get all the paperwork in order and will it be processed before the bank pass on the most recent ECB rate hike?

A quick look at www.bonkers.ie shows mortgage interest rates can range from 2% up to 6%. They are offered on either a fixed-term or variable rate.

Fixed rates mean your payments are the same for the duration of the fixed period and you can only make limited additional payments outlined in your mortgage contract. If you are already on a fixed rate, it is worth checking with your bank to see how much it would cost to break the contract and lock in a new fixed rate. You do not have to wait until the end of your fixed term.

Variable rates mean you’ll have a basic payment you need to pay; however, you can pay more as often as you like. As the name suggests, variable rates vary over time depending on many factors. If you have a variable rate, you will definitely see your interest rate increase shortly.If you have €200,000 remaining in your mortgage, with a term of 25 years, an increase of 0.75% would see your monthly repayments rise by approx. €80 per month.Is this something your household could afford when all other costs are also going up?

Tracker rates mean the interest rate you pay is linked to the ECB rate and you typically pay a margin of say 1% above the ECB rate. Those on tracker rates will have seen their repayments already increase due to the ECB increases.You should look at your tracker to see how much of a margin you are paying above the ECB rate. Some margins are lower than 1%, some are as high as 3%.If your margin is higher than 1.5% it is definitely worth considering switching to a fixed rate. With tracker rates you need to be aware of the fact that if you switch to a fixed contract now you will not have the option of returning to a tracker rate.

At a minimum, every household should be aware of the rate they are paying and review their options available with their current mortgage provider. You may be able to make further savings by switching provider but you will need to carry out a valuation of the property and employ a solicitor to take care of the processing, paperwork and liaising.

Jacinta Clerkin BSc QFA FLIA RPA is a Qualified Financial Advisor, Fellow of the Life Insurance Association and Retirement Planning Advisor. You can contact her through John F. Loughrey Financial Services by telephone on 074-9124002 or by email on jacinta@jfl.ie

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