Over 350,000 Irish households are currently on tracker mortgage, that is, their mortgage amount is contractually linked to the official rate. This was providential for them as the base rate has neared zero since seven years. But the pressure on families is about to be renewed as the Governor of the Central Bank warns that the epoch of cheap debt is soon to become a thing of the past.
Risks associated with variable rate mortgages weigh heavy
The appeal of variable rate mortgages is that the interest rate is usually lower than that of fixed-rate mortgage products. However, on the flipside, variable rates are riskier – with interest rates decreasing or increasing without warning. During many years, variable rate mortgages have been the custom in Ireland. A tracker is one type of variable rate which is connected to another amount. In the case of a tracker mortgage, if the Base Rate falls, your borrowing costs will fall correspondingly. But, similarly, if it rises, so will your mortgage repayments. This is the risky part, and this is precisely what’s going to happen in two years’ time according to the Governor of the Irish Central Bank, Philip Lane. It might even be sooner.
Fixed-term mortgage holders will be less bothered
Currently, the European Central Bank (ECB) rate is zero, which is a fortunate thing for close to 360,000 Irish households that are all on tracker rates. But with this impending reversal, those with trackers will be the very ones to feel the heat. The latter could see their interest rates easily double. Although those with fixed-term mortgages won’t be spared, they will be inconvenienced to a much lesser degree.
Borrowers are now nudged to opt for fixed interest rates
Bank of Ireland’s CEO Richie Boucher reports that 75% of new borrowers with his institution are opting for fixed rate loans. In fact, since the financial crisis, the Bank of Ireland has increasingly invited its customers to shift to fixed-term mortgages. The current case, if anything, has demonstrated how the risk of variable rate mortgages versus its reward is sometimes not worthwhile.
2017 is the last good year
Up to now, interest rate markets in Europe have indicated that the ECB will not start to increase interest rates until the second half of 2019. Following inflation in his country, Jens Weidman, the president of the Central Bank of Germany concluded that the conditions in the euro zone were good enough to justify a normalization of interest rates. Since the man is influential enough to tip the scales, the ECB is expected to be lobbied into raising the rates no later than as from 2018.
The refinancing of loans could also be tricky
Conall Mac Coille also expects things to get sour as from next year. The Chief Economist of Davy Group foresees an increase of 0.5 pc or 1 pc as from that period. The interest rates could be prohibitive even for refinancing purposes – though this typically involves reimbursing the remaining balance at a lower interest and on a more affordable term. He, therefore, cautions inexperienced buyers who are taking out a loan, to anticipate on the rates that will be in effect in two years, in case they need to replace their existing debt with another.
House prices are likely to crash
While house prices had markedly risen since 2012, the boot is now on the other leg. Home buyers are advised to be as circumspect as possible, as the Irish economy is in for some turmoil. Philip Lane throws cold water on those with the scheme of buying a house who are candidly thinking that the deal will only be advantageous when they sell later, terming it a “grave error”. For those who do buy a home, he urges them to first ensure they can make a sufficient deposit and secondly, that the loan they secure will still be within their means should the need to weather financial storms arise.
Mitigating factors should make the situation bearable
While times ahead will be invariably tough, Conall Mac Coille argues that although borrowing costs are expected to go up, wages might follow the same trend. Moreover, he contends that families are faring better now as opposed to the situation during the crisis, citing figures of household debt as a case in point. The latter has fallen by 70 pc over the last decade, shifting from 210 pc of disposable income to 140 pc while they were gradually paying off their debts.
People should break the habit of over-borrowing
Amid this interest saga, there is one lesson Irish borrowers need to learn. In early February of this year, for instance, the market was not expected to rise. But it did, due to the US raising its benchmark interest rate by a quarter percentage point in Mid-March. At any rate, people will drown if they fail to adapt to the swaying fiscal and monetary policy implemented by those in charge. Governor Philip Lane gratingly reproved customers who jump feet first into the trap of borrowing in excess if one lets them. He asserted that they failed to comprehend investment risk, hence making poor financial decisions such as buying products that do not correspond to their needs, resulting in indebtedness. Therefore, prudence is crucial.
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- Taking a mortgage for the purchase of a real estate
- Why you should lock into a fixed-rate mortgage now
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