Fixed or variable? Often the number one dilemma facing mortgage applicants is whether to play it safe with a fixed rate or take their chances with a variable one.
Fixed rates are always priced according to how lenders predict that interest rates will move. So if lenders think that the European Central Bank (ECB) will increase its base rate, they will price their fixed rates at higher than the standard variable rate and variable ECB tracker rates that currently apply.
If lenders think that the ECB rate is about to fall, their short-term fixed rates will be cheaper than their variable rates, although all too often people who opt for a fixed rate that appears to be good value end up paying more than their variable rate counterparts well before the term of the fixed rate expires. This is because lenders build such a cushion into their fixed rate offers that it makes it difficult for borrowers to ever win at the fixing game.
It is now one of those times when ECB interest rates are forecast to rise. As a result, lenders can confidently flog their inflexible fixed rate mortgages to nervous first-time buyers, arguing that opting for fixed rates means they won't be faced with sudden, potentially unaffordable increases in their monthly repayments. Discount offers aside, the only real benefit of choosing a fixed rate is the security of knowing that your repayments won't go up when interest rates do. But it is worth remembering that you will probably end up paying over the odds for this security. But in the myriad of mortgage rate options, there is a third way: a split rate mortgage.
Split rates are a compromise between fixed and variable, a way to satisfy both our cautious selves and the desire not to be ripped off. Part of the mortgage is set on a fixed rate, while the reminder attracts a variable rate. So if rates rise, borrowers have the security of knowing that only part of their loan repayments will rise. Split rate mortgages can be done on a 50:50 basis, or 60:40, or, in theory, any ratio.
IIB Homeloans has reported an increase in the number of people opting for split rates as a way to "soften the blow" of the forecasted interest rate rises.
Meanwhile, earlier this week EBS Building Society's head of mortgages, Ms Dara Deering, suggested that customers could choose to "hedge their bets" by fixing half of their mortgage, while continuing to take advantage of low variable rates. Bet hedging can be an even more sophisticated activity for the high net worth people among us, for example, buy-to-let investors.
People with large mortgage borrowings can, with the help of their financial adviser, access a range of rate hedging devices, according to Mr Ian Mitchell, managing director of Deloitte Pensions & Investments.
One such device is a "cap". Capped mortgages, more commonly available in the UK, are loans where the borrower pays a premium in exchange for a guarantee that the interest they pay will not exceed a certain rate for the term of the cap. These caps are typically taken out for a three or five-year term, Mr Mitchell says. But in the Republic they are not available to the general public, instead offered only on a case-by-case basis to people with significant debts, usually in excess of €1 million.
For the moment, simple split rate mortgages remain the only way for the majority of people to find a middle ground between fixed and variable.
