Bank of Ireland is giving borrowers a chance to lock into record low interest rates for the next decade by reducing its 10-year fixed mortgage rate to 4.99% from 6.19% previously. Long-term fixes also allow homeowners to borrow more because they do not have to prove that they could afford higher payments when interest rates eventually start to rise. We look at the details.
WHY FIX?
Fixing has been unpopular because fixed rates are generally much higher than variable ones.
Advertisement
Economists have blamed the lack of competitive long-term deals for contributing to Ireland's boom and bust cycles.
Bank of Ireland's new 10-year fix narrows the gap with variable deals considerably.
Although it is still higher than the current variable rate of 4.5%, the premium may be worth paying to insulate yourself when interest rates inevitably rise from their historic lows. The 10-year fix compares well with the bank's other fixed deals: 4.35% for two years, 4.60% for three years and 4.85% for five years. The deal, available from last week, is the only 10-year deal on the market, with other lenders offering fixes for five years at most. The 4.99% rate is available to Bank of Ireland's new and existing customers and for mortgages of up to 90% of the value of their homes.
Garry Manning of OMAC Mortgages & Finance, a broker in Clondalkin, Co Dublin, said: "This is a good offer at a good rate. Hopefully it will encourage other lenders to bring out similar deals."
CAN I BORROW MORE?
Advertisement
Those fixing for longer than five years should qualify for bigger mortgages because they do not pass a stress test set by the Central Bank to prove they could afford the payments if mortgage rates went to 6.5% — two percentage points more than current variable rates.
"Instead of being stress-tested at 6.5%, you would only have to show you can afford to pay at 4.99%,” said Manning.
Suppose you can afford to pay €1,200 a month. At a stress test rate of 6.5%, you would qualify for a mortgage of €198,000 over 35 years. At 4.99%, this increases to €238,000 — allowing you to borrow €40,000 more.
WHERE'S THE CATCH?
A 10-year fix is suitable only if you will not want to move house or repay some of the mortgage ahead of schedule over the next decade. Otherwise, you could be penalised for breaking the contract early. The penalty could be as much as €8,000 to end a fixed deal on a €200,000 mortgage after two years.
Advertisement
"It is difficult to find out in advance what the penalty might be," Manning said. "For simplicity, I tell clients to expect to pay about half the outstanding interest."
Bank of Ireland's 10-year fix could turn out to be poor value if competition forces Irish mortgage deals into line with those in other European countries, where mortgage rates are much lower.
Figures from the European Central Bank (ECB) show the rate on a new 10-year fix averaged 2.99% across the eurozone in July, considerably less than Bank of Ireland's 4.99% deal.
Brendan Burgess of Askaboutmoney.com, a personal finance website, said: "The huge gap between mortgage rates in Ireland and other eurozone countries is not sustainable. I would expect mortgage rates to come down in Ireland, even if the ECB raises interest rates."
TOP TIP
Advertisement
Do not consider fixing, no matter how good the deal, if you are lucky enough to have a tracker mortgage. Fixed rates are unlikely to beat tracker deals, no matter how high interest rates rise. If you fix, even temporarily, lenders are unlikely to allow you to return to a tracker at the end of the deal.