I’m looking for some advice on my mortgage. There has been a lot of advice about taking out longer-term fixed rate mortgages of late but I have not seen any for people who are already on medium-term fixed rates
I’m currently four years into a 10-year fixed rate mortgage with KBC and I am wondering if it makes financial sense to pay the break fee and get a 15- or 20-year rate?
My current account is with them so I avail of their discounted customer rate.
The value of the property is €370,000 and I have €165,000 left on the mortgage.
Mr TN, email
You’re right. there has been a lot of advice from me among others to consider longer-term fixed rates as consumers are faced with the prospect of rising interest rates for the first time in a decade.
A whole generation of borrowers have never had to reckon with such increases and it could make a significant difference. A half percentage point increase might not seem a lot in the abstract, but when existing market rates are as low as they are, every quarter-point rise means a noticeable increase in monthly repayments.
The issue for you and many others who are already on fixed mortgage rates with KBC and Ulster Bank and are now actively considering their banking arrangements is whether the figures add up.
As of now, you can get a 20-year rate with Avant at 2.5 per cent. On your outstanding mortgage of €165,000, that would cost you just under €875 a month and close to €210,000 over the 20 years of the loan.
If that goes up by half a point by the time you lock in later this year, you’re going to be paying around €40 a month more and almost €10,000 over the life of the loan.
And rates are likely to go up by more than that before we’re finished. No doubt the next question is “by how much?” and the truth is no one knows. What we do know is that the rates we have enjoyed for the past decade have been at historic lows, even with Irish borrowers having to pay a premium over our European cousins because of the reckless behaviour of our banks during the Celtic Tiger years – and also because the European Central Bank strongly disapproves of the way it is next to impossible for lenders to act on their security in cases of default; in plain English, the difficulty banks have evicting people through Irish courts and getting their hands on the property.
Most Irish people would probably agree with the courts’ policy of keeping the prospect of people giving up their homes very much as a last resort and that’s fine. But we then need to accept that the price of that policy will be that we pay more for our home loans.
That’s one side of the equation: the other half is what it will cost you to get out to get out of your current fixed rate. As you say, you are already benefiting from the 0.2 percentage point cut you get as an existing KBC bank customer.
You’ll need to check that out with KBC. What you need to figure out is whether the cost of getting out is more or less than the cost of switching to a longer-term rate elsewhere – and it will be elsewhere as KBC are no longer offering mortgage products here. You’ll also need to factor in the cost of switching, which will involve getting a new valuation for your property and also some modest legal fees – in the region of €1,000.
The other thing, of course, is time. It would be a surprise if the European Central Bank does not raise interest rates by at least a quarter point at their next meeting – and that is on July 21st, this Thursday. Even if you could get details of the break fee and a switching application in, you’re not going to be ready before then so you really need to see the state of play after the imminent rate rise and crunch the numbers in that context.
It is certainly something that is worth considering and your loan to value is below 50 per cent so you will certainly have access to the best loan rates in the market. Only you can get details of the break fee which will be instrumental in deciding if it is the right move for you.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice
