If you’re one of the 30,000 plus would-be first time buyers that got mortgage approval last year, and are hoping to draw down your loan at some point this year, figuring out what kind of product to go for might be on your mind.
After 10 consecutive interest rate hikes – the last of which was in September 2023 – the pendulum seems to have swung in the opposite direction, and with inflation receding, expectations are that the next movement will be downwards.
But by how much could rates fall? Could it be enough to hold off on your house purchase to avail of cheaper rates (albeit risking an increase in house prices)? Or should you opt for fixed or variable if you buy now?
Making a decision is not as straight forward as it might otherwise appear, and any prospective rate cuts may not be as much as some might hope for.
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While inflation may have peaked – it fell to 2.9 per cent in December 2023, close to the ECB’s target of 2 per cent, and down from 9.2 per cent just a year earlier – this may not mean that interest rates will fall accordingly.
[ First-time buyer mortgage activity rises to highest level since 2007Opens in new window ]
Last month analysts warned that talk of a rate cut was premature, with suggestions that the ECB would want to see inflation below its 2 per cent target for a number of months before it would consider a rate cut. The Financial Times recently said the bank would be likely to target a “neutral rate of interest”, or the borrowing rate that keeps economies growing steadily, with full employment and inflation at about 2 per cent. And this “neutral rate” would be unlikely to be as low as it was in the recent past.
For Irish borrowers, what’s happening at ECB level doesn’t always feed through to how much they spend on their loans.
Until rates started to edge upwards in 2022, Irish borrowers on non-tracker mortgage products fared among the worst across Europe, as banks failed to pass on those record low rates, which bottomed out at zero.
Then, Irish borrowers did somewhat better than their European counterparts, as rates – at least for those on fixed and variable rates – did not move sharply upwards in line with the jump to 4.5 per cent in the ECB rate. Irish mortgage rates increased only by an average of about 1.5 per cent.
So it’s likely that rates won’t move downwards – or at least not significantly – over the coming months and year.
Most first-time buyers continue to opt for fixed rates – Central Bank figures indicate about 60 per cent of all outstanding mortgage balances are now on fixed rates.
And the best value is still typically found here.
While one could argue that opting for a variable rate, at a time of likely downward movement in rates might be the best option, experience would suggest otherwise. Indeed variable rates were higher than 4 per cent even when ECB rates fell to zero, so opting for such a rate in the expectation that banks will push down their variable rates when the ECB does may be unwise. After all, they can even go back up.
Today, variable rates range from 4.15 per cent at AIB, to 7.4 per cent at Finance Ireland.
If you opt for a fixed rate, you can get a rate as low as 3.65 per cent, which sounds better – but you have to lock into this lower rate for four years.
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