Interest rates are on the way down again, with the European Central Bank cutting rates by another 0.25 of a percentage point today and further reductions expected later in the year.
It is good news for borrowers, but in a rapidly changing market it is important to avoid making mistakes. And the spread of interest rates being offered by the borrowers in the Irish market and the variety of different terms and conditions applied mean that mistakes can be made. You might think that competition in the market would mean mortgage rates would all be within a narrow enough band. But, in Ireland, this is not the case. Here are the key mistakes to avoid.
1. Not paying attention to the outlook
ECB interest rates have come down from their peak, with the deposit rate having topped out at 4 per cent – a rate which applied from September 2023 to June 2024 – and fell today to 2.25 per cent. The key thing for borrowers to realise is that further reductions are expected over the balance of the year. How significant these will be is open to question and depends to a large extent on whether a full-scale trade war breaks out between the EU and the US and what the impact on EU growth is of the uncertainty in the meantime.
In the immediate wake of Trump’s “Liberation Day” announcement of 20 per cent tariffs on the bulk of EU imports, markets were betting there might be three further quarter point cuts after today. Now many anticipate two further reductions.
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There is no point trying to second guess the precise details, but in assessing their options borrowers need to realise that official interest rates will most likely continue on a downward trend and that they need to take this into account in their decisions. Tracker mortgage holders, whose borrowing cost directly follows one of the key ECB rates – the refinancing rate – just have to sit back and enjoy the savings, having been hit hard during the upward move in rates. Elsewhere the general downward trend in loan offers will continue, but the pace will vary across lenders.
[ ECB interest rate cut: What does it mean for mortgage borrowers?Opens in new window ]
2. Not taking the dangers into account
The world is now an uncertain place and this poses some risks to incomes and jobs. Mortgage broker Michael Dowling says those relying on high earnings to take out large loans – €500,000 plus – for expensive properties need to be cautious. Many of these higher earners are working in multinational sectors which could fall victim to Donald Trump’s tariffs, or the wider global trade war. Or in industries which rely directly on multinationals.
These borrowers are depending, he said, not only on their basic income but also on bonuses and stock options (often structured via restricted stock units) to calculate what they can afford. Some of these may be vulnerable. Dowling expects this uncertainty – and a general change in sentiment – to affect the higher end of the housing market as the year goes on, though he expects demand at the new homes and middle range second hand market to remain solid.
3. Locking in at too high an interest rate
This risk comes directly from the trend identified above and from the remarkably big gaps in the market between the best and worst rates. There is no shortage of good offers for those buying newly built homes with good Ber ratings, including from the big players. AIB, for example, offers three-year “green” mortgages on homes with a rating of between A1 and B3 of between 3.1 per cent and 3.3 per cent, depending on the size of the loan compared to the value of the property, or LTV ratio (lower rates generally apply for LTVs of 60 per cent or less). Bank of Ireland also ranks its offers by Ber rating in a slightly more complicated way.
There are also options for those seeking to refinance expiring fixed-rate loans, often taken out at low interest rates five years ago. These borrowers need to be particularly careful not to take the first offer from their existing lender and to consider their options carefully. Even for homes that do not have a high Ber rating, there are options in the market from lenders such as Avant and Permanent TSB which are a lot lower than many of the non-green fixed rates from the big lenders.
Will these rates now fall again generally? Broker John Fahy from Pangea Mortgages is cautious, pointing out that the three main lenders didn’t fully pass on rate increases and are unlikely to go lower with some of their better existing offerings. They also already have a big share of the market.
The mistake to avoid is not seeking the best offer and locking in at too high a rate at a time when interest rates are falling. Even if this involves the hassle of switching, it is well worth considering. AIB, for example, may have some attractive green rates. But among the highest rates on the market are the fixed rates currently offered by AIB and its affiliates EBS and Haven for non-green loans.
tTheir fixed rates are generally north of 4.5 per cent, with AIB offering a five-year fixed rate of 4.8 per cent, Haven a 4.85 per cent and EBS at 5.1 per cent. While AIB does offer a cheaper four-year fixed rate for bigger borrowers with loans of over €250,000, the general fixed rates applied by the bank and its two affiliates are now, simply, out of line with the market and with ECB rates. If time is an issue, it would be even better to go on a lower variable rate for a period when considering the options.
While there is competition in some areas, the wide gap between the worst and best rates shows that the Irish mortgage market is still a strange one. Since the departure of big players Ulster Bank and KBC, the market is now dominated by the “big two” – Bank of Ireland, and AIB and its affiliates. Together with Permanent TSB they control more than 90 per cent of the market. The bigger players can fund borrowing from large deposit bases on which generally low interest rates are paid.
“The unwillingness of Irish customers to move near zero return deposits out of the main three banks means that their cost of funds for a mortgage is nearly zero – compared to open market rates that the others have to pay,” according to Fahy. This makes it more difficult for competitors who rely on the wholesale market to survive the interest rates cycle.
4. Not considering the smaller lenders
Some of the smaller lenders have indeed had a hard time as interest rates went up, and Finance Ireland has now withdrawn from mortgage lending. But there are other options, including Avant, owned by Spain’s BankInter, which has some attractive fixed rates and has been building its share; and ICS Mortgages, which has become more active again as interest rates fell.
Nua Mortgages, launched last summer and Moco, which is owned by Austria’s Bawag bank, have been making some inroads into the market.
Fahy believes the general fall in market rates will allow some of these lenders to improve their offerings in the near future.
Some of these institutions are also innovating in terms of products, with Dowling pointing to a competitively priced new variable rate Flex Mortgage from Avant, linked to wholesale borrowing cost and with a rate which is reset every twelve months as one which may suit some borrowers.
5. Not minding the terms and conditions
There was a time, many years ago, when banks had just one or two mortgage rates, and the bulk of the market was variable. Now the bulk of new borrowing is at fixed rates and the banks all have a host of rates depending on a variety of factors, the most important of which are the loan to value ratio, the size of the loan.
Many offer discounts for bigger loans and, with some institutions, the Ber rating. But the terms and conditions also vary from bank to bank. Dowling says borrowers need to pay particular attention to penalties from breaking out of a fixed-rate product and whether lump sums can be used to pay down some of the loan, or monthly payments can be accelerated.
These can all be important issues, depending on the borrower, and mean that advice from an independent mortgage broker is well worth the time taken.
It is unwise, on the flip side, if you are taking a new loan or refinancing an existing one to just take the first offer from your bank. For all their cuddly marketing spiel, they are out to make as much from you as they can and it is up to you to find the best deal. And while the variety of cashback offers may tempt borrowers and are worth factoring in, the key consideration should always be the long-term cost.
