Is now a good time to lock into a 20-year mortgage?
Appearing before an Oireachtas Committee at the end of 2016, the then chief executive of Bank of Ireland more or less admitted that the bank was deliberately keeping its variable mortgage interest rate elevated.
Richie Boucher was making a big push at the time to get people to opt for one of the bank’s fixed rate products.
“We are deliberately incentivising customers to move to fixed rates,” he explained.
“The borrower gets certainty on what they repay, and we get certainty from our point of view.”
And the strategy appeared to be working. The Committee was told that about three quarters of Bank of Ireland’s new lending at the time was in the form of fixed rate loans.
Four in five mortgages now fixed
Fast forward almost five years and fixed rates make up the vast majority of mortgage lending here.
According to the Central Bank, fixed rate mortgages now account for over 80% of all new mortgages taken out.
While the bulk of it is accounted for by fixed rate terms of up to five years, the banks are now offering fixed rates for longer periods.
KBC, Ulster Bank, Bank of Ireland and AIB all offer 10-year fixed rates at present, starting from 3.15% for those with a 10% deposit.
Avant Money – which entered the mortgage market here last year – recently undercut its competitors with a 10-year fixed rate of 2.65% (with a 10% deposit).
It’s the best available 10-year rate on the market right now.
However, overshadowing Avant’s offer has been a relatively new innovation – in the Irish market at least – from the non-bank lender, Finance Ireland.
It has started offering fixed rate mortgages of 15- and 20-years duration (as well its own 10-year fixed rate) with rates as low as 2.5% over 15 years (with a loan to value ratio of less than 60%) and 2.6% fixed over 20 years (also with a deposit covering at least 40% of the property value).
With a 10% deposit, the equivalent rates are still very attractive at 2.95% and 2.99% respectively.
A new departure for the Irish mortgage market
Fixed rates of up to 20 years duration are relatively commonplace in other European countries but have been almost unheard of here.
Bank of Ireland offered a 20-year fixed rate mortgage at one point in the late 1990s, but it appeared not to have made much of an impact on the market at the time.
Almost certainly, it fell by the wayside with the rise to prominence of the tracker mortgage in the years that followed.
Today, fixed rates of a lengthier duration have been slowly making their way onto the menu of products from finance providers.
Trevor Grant, Chairperson of the Association of Irish Mortgage Advisors, said the Irish market has been an outlier in this regard.
He wonders why we have been so accepting of such a high degree of uncertainty around the cost of financing our home purchases for so long.
“If a developer told us the price of a house could be €300,000 or maybe €350,000 or possibly even €400,000 and that they could only confirm the price after we bought the house, we’d run a mile, yet we seem to accept uncertainty when it comes to the cost of mortgages.”
Rachel McGovern, Director of Financial Services at Brokers Ireland believes the late arrival of Ireland to the provision of long-term fixed rates is testament to the absence of a consumer-led approach to mortgage lending here.
“We have always maintained that mortgages are long-term products for which lenders can readily source long-term funding,” she said.
“That makes them very secure – for consumers and for lenders. That they are only now entering the Irish market indicates just how staid, unimaginative and above all non-consumer-friendly the Irish mortgage market has been.”
Why is Finance Ireland offering 20-year fixed rates now?
It’s a good question in light of the recent talk about inflation and the prospect of price rises possibly forcing Central Banks to raise interest rates to keep economies from over-heating.
The US Treasury Secretary Janet Yellen recently conceded that interest rates may have to rise in the US to keep a lid on growth, brought about partially by massive stimulus programmes to get the US economy back on track after the pandemic.
Similar programmes (but not quite as ambitious in scale) are being deployed in the euro zone, but the European Central Bank appears not to be too concerned about the prospect of inflation.
Philip Lane, a former Governor of the Irish Central Bank and now the chief economist at the ECB, recently said that there was ‘nearly zero connection’ between price rises associated with the reopening of the economy and the long-term inflation trend.
In other words, the European Central Bank won’t be in a rush to raise interest rates any time soon.
Finance Ireland must be factoring this into its long-term thinking and is reckoning that it can secure money at relatively low rates to make this viable for them while making it sufficiently attractive to consumers at the same time.
It will be interesting to see how other providers respond.
“If the demand for these products is strong, other lenders will make moves to bring similar offerings on stream,” Joey Sheahan, Head of Credit with MyMortgages.ie said.
“If they are not already in the process of doing so,” he added.
So, what’s the logic behind fixing for such a lengthy period if rates are not going to rise?
Two decades is a very long time and a lot can change in that period.
If you look back 20 years ago, it was pre-financial crash in Ireland. Inflation was running at over 5% and mortgage interest rates were as high as 6%.
Had you notionally fixed for 20 years then, you’d now be coming out of a comparatively expensive mortgage to what’s been available on the market in more recent years.
However, the lending landscape is much changed these days.
One thing that can be said with a fair degree of certainty is that interest rates are not going to go much lower.
The base rate at the ECB level is at zero after all. While conceivably rates could go negative (as they have with deposit rates), it’s not likely to happen.
For the certainty that a 20-year fixed rate at around, or below, 3% could bring, it is certainly worth considering.
And in light of all the inflation talk, those of a risk-averse nature might decide it’s worth it.
“When these things turn it can often happen quickly and unexpectedly,” Rachel McGovern pointed out.
“That is why having security around what your future mortgage repayments will be – normally a household’s biggest outlay – is important and enables people to better plan their futures.”
What if competition brings rates even lower?
That’s a distinct possibility.
While the ECB base rate is at zero, there is still scope for lenders in the Irish market to move lower.
After all, we have among the highest mortgage interest rates in the euro zone.
According to the most recent figures from the Central Bank, the average interest rate on new lending here in April was 2.8%.
That compares to the euro zone average of 1.26%.
Analysts suggest that the high rates charged here are a reflection of the elevated levels of capital reserves that Irish lenders are required to hold, but also of the difficulty that they have in repossessing a property if the borrower doesn’t make repayments on their mortgage.
Should those parameters change, more lenders could be persuaded to enter the market here, potentially driving rates lower.
Given that Avant has made the leap in recent months, it suggests the market is not wholly unattractive to new lenders.
On the other hand, our track record at keeping lenders in the market is not great with Ulster Bank (NatWest) and KBC the most recent institutions to signal their intention to withdraw from the market here in the coming years.
That reduces the prospect of competition in the medium term.
The verdict on fixing for 20 years
If you like the certainty of knowing how much exactly you’d be paying every month for the next two decades, the new Finance Ireland product is for you.
There’s a reasonably high probability that rates will increase in the coming years, possibly making these rates look very attractive in hindsight.
On the other hand, the ECB main lending rate may stay at zero for many years to come or may revert after a temporary period of slightly higher rates.
That, in tandem with some competition in the mortgage market, could see rates falling further in the years ahead.