Mortgages can be confusing and short of having a crystal ball to predict how rate might look in the future, we can only rely on market trends, weigh up our options and listen to the experts who consider these matters to be their bread and butter. Even if you've committed to one particular mortgage rate, you’re not stuck. You can look to switch if you find a better deal elsewhere.
As it stands, if inflation continues to rise, the European Central Bank (ECB) may consider increasing interest rates. When this happens, one of the implications is that the cost of borrowing becomes more expensive, as inflation essentially reduces the value of money. Higher mortgage repayments are one of many unfortunate consequences of this. So, how can this be avoided? Well, it depends on your mortgage interest rate.
Mortgages come with different types of interest rates:
Variable Rate: A rate that can rise or fall, and your repayments are determined accordingly.
Fixed Rate: Your rate set so repayments remain the same for a fixed period of time ranging from 1 year to 30 years.
Split Rate: A mixture of fixed and variable rates, your mortgage is split into a hybrid of the above.
The latest commentary from the ECB's Chief Economist, Philip Lane, suspects that an inflation rate increase of 0.5% could be seen this year. If this goes ahead, there’ll be an increase in mortgage repayments of €25 a month for every €100,000 that you owe (repaid on a 25-year term). For example, if you owe €300,000, your mortgage repayments would increase by €75 a month, or €900 a year. That’s a substantial difference to factor into your monthly budget.
A fixed interest rate on your mortgage allows you to safeguard against increases that can potentially come with variable and split-rate options. Your repayments won’t change during the fixed period, meaning you can budget accordingly.
If your mortgage is currently on a short term fixed rate and you are considering whether it’s a good idea to fix for longer then it is a good idea to contact your mortgage lender to ask if there would be a break penalty to break out of your current fixed rate. Due to increased funding costs break penalties have decreased in the last six months. You can then assess whether it makes sense to lock into a longer fixed rate but first ensure you check all market rates to ensure you don’t pay more than you need to.
At the moment, fixed mortgage rates are at their lowest for over a decade, and longer-term fixed rates (up to 30 years) are available at a more competitive rate than they have been before. With 7-year fixed rates currently available from 2.25% and 10-year fixed rates from 2.4% interest, now is a good time to lock down a low rate to provide stability and security over repayments for the medium to long term.
Positive news for homeowners is that the value of your home may have benefitted from the double-digit nationwide price increases over the last two years. Banks tier their rates by loan to value which is the balance on your mortgage as a percentage of the value of your home. Soaring house prices mean that thousands of buyers are now unknowingly eligible for lower mortgage rates than previously thought.
Particularly if you’re looking for a medium to long-term mortgage, it’s wise to lock down the lowest fixed-rate available, so you don’t end up paying more than you need to and can factor the fixed repayments into your budget. The uncertainty of variable rates can work in your favour if they fall, but on the flip side, a rise could throw your usual outgoing budget out of whack for an unspecified amount of time. Whatever your preference, be sure to do your research and get market-based advice from a broker who can work with you to find the best option for your particular needs. A well-informed decision is always better than an optimistic hunch, after all.
To see if you can save, check out our mortgage-switching calculator at doddl.ie. They
work with eight lenders and their trusted team of mortgage specialists will guide you through the free mortgage-switching process.
Mortgage Horizons Limited T/a doddl is regulated by the Central Bank of Ireland.
Warning: If you do not keep up your repayments you may lose your home
Warning: You may have to pay charges if you pay off a fixed-rate loan early
