Will you fix in future?
05 Sep 2010
Experts are divided on when interest rates may rise, but if you decide to go for a fixed-rate mortgage, you need to act quickly, writes Emma Kennedy
The decision on whether to f ix your mortgage interest rate now depends on your long-term view of interest rates themselves. Future moves in mortgage interest rates will be governed by two events - the actions of retail banks and those of the European Central Bank.
Retail banks have already shown their inclination to rebuild their balance sheets with their customers’ money, with standard variable rates inching upwards in recent months, despite ECB rates remaining at record lows.
‘‘Now that lenders have taken to increasing the cost of finance on standard variable rates, the best move is definitely to fix,” said Frank Conway, director of Irish Mortgage Corporation.
‘‘Banks have taken back control of their cost of operations, and will do all they can to survive. The financial risk to borrowers with a standard variable rate cannot be overstated.”
Banks are likely to continue with the trend in rate hikes, citing increased funding costs as their justification, but they will definitely hike again once the ECB puts up rates.
When that day will come is unclear. ECB president Jean Claude Trichet last week announced that interest rates would remain at a record low of 1 per cent, for now.
Trichet said the ECB expected ‘‘price developments to remain moderate’’, adding that recovery should proceed at a moderate pace, with ‘‘uncertainty still prevailing’’.
Commentators agree little movement is likely from the ECB before 2011,but the timing and magnitude of subsequent ECB interest rate decisions does not attract similar consensus.
Jim Power, chief economist at Friends First, said Europe’s core, led by Germany, was doing quite well, while other European economies, such as Spain, Portugal, Greece and Ireland, were struggling. ‘‘The ECB has to set interest rates for the whole euro area, so it will undoubtedly have some concerns about the strong momentum in the German economy and the potential for higher inflation,” he said.
‘‘Despite the ECB’s upward revision to growth prospects for the Euro area, the reality is that around 20 per cent of the region will experience tough economic times over the coming year and that should dampen any enthusiasm the ECB might have to increase official interest rates any time soon.
‘‘Also, inflation remains very well-behaved, so there is no immediate pressure on the ECB to take official rates higher.”
Power said it was hard to see the ECB hiking official rates until the second quarter of next year, but said the risk would ‘‘probably increase as 2011 progresses’’.
Ronnie O’Toole, chief economist of National Irish Bank, said he thought the ECB would keep interest rates on hold until the final quarter of 2011, adding that increases would be slow when they came. He predicted an initial increase of 0.25 per cent. Some see the increase coming earlier.
‘‘Our base case is for the first hike to come in June of next year,” said Simon Barry, chief economist at Ulster Bank. He predicted that ECB rates would hit 1.75 per cent by the end of 2011, with three rate hikes of 0.25 per cent each.
‘‘This scenario envisages a gradual process of getting rates back up towards normal levels,” Barry said.
However, he added that his predictions depended on economic performance in the intervening months. ‘’Recovery is by no means copper-fastened and downside risks from the United States and global economies have certainly increased lately. If such risks materialise and the euro zone economic recovery falters, we could well see a scenario where ECB rates are unchanged for all of next year.”
For borrowers who do decide to fix, the advice from experts is to act quickly. Rachel Doyle, director of mortgage services with broker group PIBA, said that while media attention had focused on rising standard variable rates, fixed rates had also been creeping upwards in recent months.
Doyle said that borrowers who intended to fix should consider a longer-term fixed rate, such as five years.
‘‘If you go for a shorter term, such as two or three years, you could end up coming out of the fixed rate at the wrong time,” she said, adding that interest rates could still be rising in two or three years’ time. She said rates would more likely have stabilised within five years.
According to Doyle, Irish borrowers are less likely to fix than their European counterparts, meaning mortgage holders here are more vulnerable to rising interest rates.
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