If you're a mortgage holder whose fixed rate is set to expire over the coming year, you need to start planning now for potentially much higher repayments.
Since July of 2022 the European Central Bank (ECB) has embarked on an aggressive path of monetary tightening to try bring down high inflation.
In that time it's raised interest rates by a whopping 4.50 percentage points, as anyone with a tracker mortgage will be all too aware. And those on variable rates or who have recently taken out a mortgage for the first time will have noticed the big hike in interest rates too.
However mortgage customers who have been on a fixed rate for the past few years will have been shielded from the rate hikes so far and many will be enjoying rates of around 3% or less right now. But thousands of these mortgage holders are in for a potentially nasty shock over the coming year when their current fixed rate ends and they are faced with much higher rates.
If you're one of these fixed-rate mortgage holders then you need to start planning now. So take this article as essential reading...
Where are we now?
At the moment the cheapest rate in the entire market is 3.65%, which is a fixed rate on offer from Haven and Bank of Ireland. This compares to rates as low as 1.90% which were on offer at the start of 2022.
However this is a ‘green’ rate so to avail of this rate your home must have an A or B energy rating. And Bank of Ireland only offers this rate to brand-new customers.
The best rate available to most existing mortgage holders who are coming to the end of their fixed rate will be at least 4% or more.
So if you’re currently paying a rate of less than 4%, you need to be prepared to face an increase in your mortgage repayments.
If you had €250,000 remaining on your mortgage over 25 years and are currently paying a rate of 2.50%, your monthly mortgage payment would go up by around €270 a month if you ended up on a rate of 4.50%. So it’s a big hike.
What to do?
By law, 60 days before your fixed rate is due to expire, your lender must write out to you to inform you of your options and the new rates available to you (your ‘rate options’ letter).
However this isn’t a huge amount of time. And it’s not really enough time if you’d like to switch your mortgage to another lender.
Ideally you should be planning what to do around three to four months in advance of your fixed rate ending.
If you’re unsure when your fixed rate is about to end, contact your lender ASAP and ask them. Also ask them how much you still owe on your mortgage and how many years are remaining. And ask them what rates they’re currently offering their existing customers.
That way you can research the options available to you in advance of getting your rate options letter or at least start budgeting for potentially higher repayments now.
So what happens when you come to the end of your fixed rate?
Well, you have a few options.
1. Roll over onto your current lender’s standard variable rate
If you take no action, you will automatically roll over onto your current lender’s standard variable rate (SVR).
Being a variable rate, this rate could then go up or down over the following years.
This is an option many people end up doing either because they don’t read their rate options letter properly or they simply ignore it.
The problem is that some lenders' SVRs can be very high, and higher than their fixed rates, so make sure you don’t automatically roll over on an SVR by mistake.
2. Choose a new fixed rate with your current lender
You also have the option to lock into a new fixed rate with your lender.
Depending on your lender, you may have the choice of choosing a new fixed of up to ten years. Or even longer. However PTSB only offers up to seven years.
As the name suggests, a fixed rate won’t change for the duration of the term. So if you choose a new five-year fixed rate, for example, you have the peace of mind and certainty in knowing that your mortgage payments won’t change for another five years.
But it also means that if interest rates fall over the coming years, you won’t benefit from the fall either.
However the fixed rates your lender offers you may not be as good as the fixed rates it’s offering new customers or as good as the rates that are available elsewhere.
That’s why it’s also important to consider shopping around. Which brings us onto your next option….
3. Switch to a new lender
In the same way you shop around when you get your car insurance renewal, it’s also a good idea to try shop around when you get your rate options letter as there may be better value out there.
For example, at the moment Bank of Ireland is offering a four-year fixed rate of 3.95% to new customers who are borrowing at least €250,000. However the cheapest fixed rate it offers its existing customers is 4.15%.
However if you have at least 30% equity in your home and switched to Avant Money you could get a rate of 3.90%. And if you have over 50% equity in your home you could get a rate of 3.75% if you moved to AIB.
So it can certainly pay to shop around and look at switching lender.
Of course, switching mortgage may not be open to everyone. If your financial circumstances have changed for the worse since you originally took out your mortgage, or you've taken on new borrowings, or even had more kids, you may not be approved for a mortgage switch. And there are legal fees of up to around €1,500 that you’ll have to pay so this is also something to consider.
4. Wait and see
It’s highly likely the ECB will start cutting interest rates sometime later this year. From around June or July.
Tracker customers will benefit almost immediately from any rate cuts.
But for everyone else, it’s less clear.
The main banks have passed on less than half of the ECB rate hikes so far to their non-tracker customers. So it’s unlikely they’ll pass on any rate cuts immediately. It could be several more months, or into 2025, before the main banks reduce their mortgage rates.
As a result, a fourth option might be to choose a variable rate for now, and then lock into a new fixed rate sometime next year if rates have come down. There is no cost in moving from a variable rate to a fixed rate and you are free to do so at any time.
Can I just continue to pay the same rate?
Unfortunately, no.
Sometimes people are under the assumption that they’ll be allowed continue to pay the same rate they’re currently on as long as they just agree to lock into another fixed term.
But the rates you’ll be offered when you come to the end of your current fixed rate will be based on the prevailing market conditions and interest rates at that time.
And for anyone rolling off a fixed rate over the coming year, that’ll probably mean a much higher rate than they’ve been used to paying.
Get good advice
Regardless of the option you go with, it's important to get sound financial advice.
And the good news is that here at bonkers.ie we can provide just that!
Our in-house team of mortgage specialists can guide you through your options, and if you decide to switch lender, we can help you do that through our new mortgage broker service.
Our mortgage broker service is fully digital from start to finish, meaning everything needed to switch lender can be carried out online from the comfort of your home. And it's also free!
More info
Some banks offer cashback to those who switch which you can read about here.
If you're wondering how the process of switching mortgage works, our guide here explains just that.
Wondering if you should choose a fixed rate over a variable rate? Our guide talks through the pros and cons of each option.
