Variable Rates

Variable rates can fluctuate in line with European Central Bank (ECB) increases or decreases in the base rate, lenders’ costs and market forces.

Variable rates offer most flexibility. They allow you to pay extra off your mortgage, extend your mortgage term or top up your mortgage without having to pay any penalties. However because variable rates can rise and fall your mortgage repayments can go up or down during the term of your loan.

Your lender can decide (except in case of a tracker mortgage) whether or not to pass on ECB rate increases or decreases in whole or in part to you.

Variable rates generally suit if you are in a financial position where an increase in interest rates would not adversely affect your ability to repay.

Should you wish to repay your mortgage early, pay in lump sums, reduce your term or increase your repayments, there are no penalties with a variable mortgage.

Here are some different types of Variable Rate options:

• Standard variable rate – when European Central Bank (ECB) rates rise, your lender can pass on the increase in whole or in part. If ECB rates fall, your lender may pass on some or all of the reduction to you. The variable rates offered by a lender also depend on the lenders’ costs and the level of competition in the market. Lenders are not obliged to pass on any rate reduction in full or in part and can increase rates if they decide to do so.
• Loan-to-value (LTV) Variable rate – these rates depend on the size of your mortgage compared to the value of your home (the loan to value). If you borrow €150,000 and your property value is €300,000, you are borrowing 50% of your property value. You then have a LTV rate of 50%. Generally the lower your loan to value the lower the variable rates offered. Lenders generally band loan to value rates <60% LTV, 60-80% LTV and >80% LTV. This is because there is a lower risk to the lender as your home is worth much more than the amount of your mortgage.
• Discounted Variable rate – this is a temporary rate, set below the standard variable rate. It is usually offered as an incentive to new customers and gives you lower repayments for an initial period, typically 12 months. At the end of that time you have the option to go onto the fixed or variable rate on offer at that time. Before you accept a discounted offer, make sure you know what rate you roll onto after the offer ends.
• Tracker Rates – Now withdrawn from the Irish mortgage market for new customers and only apply to existing customers who have a tracker rate granted in their loan offer and who have maintained this rate.

Fixed Rates

With a fixed rate mortgage, you undertake to pay a set amount per month for the fixed term; your rate is guaranteed not to change during this fixed period and as such your repayment remains the same.  During the fixed period you are therefore protected from any increase in interest rates. However if rates decrease and you are on a fixed rate you will not benefit from any rate cuts that your lender may pass on to variable rate customers.

Fixed rates are commonly available over one to five years with 7 and 10 years fixed rates also available from some lenders.

Fixed rates are suitable to an individual who needs to and likes to budget their outgoings over a period of time. It gives you certainty as to what your repayments will be for a certain period of time.

If you are in a fixed-rate contract, there are usually penalties if you want to switch lenders, switch to a variable rate, re-mortgage or pay off all or part of your mortgage early. This penalty will relate to any cost the lender incurs in your breaking your fixed agreement. You should be aware of these penalties before you sign up to a fixed-rate contract (the break penalty calculation will be included in your loan offer document) and before you decide to exit a fixed-rate contract (lender will provide calculation on request).

You cannot usually pay more each month than your standard repayment on a fixed rate – there are some exceptions here where lenders will allow an overpayment of up to 10% of the capital amount during a fixed period.

Split Rate Option

A split rate is where a portion of your mortgage is on a fixed rate and the other portion is on a variable rate. This allows flexibility with regard to overpayment on the variable piece of the mortgage with certainty of repayment on the fixed element.

As at February 2016 fixed rates offered by some lenders can be lower than the prevailing variable rates on offer. A full rate comparison schedule is available from Mortgage Horizons on request. We would also be delighted to discuss the advantages and disadvantages of fixed and variable rates with regard to your particular financial situation. Please email info@mortgagehorizons.ie and include Rate Comparison Schedule in the subject line or call 01 6624600.