Appearing before an Oireachtas committee in late 2016, the then chief executive of Bank of Ireland more or less admitted that the bank was deliberately keeping its variable mortgage interest rate high.
Richie Boucher was then making a big effort to get people to opt for one of the bank’s fixed rate products.
“We are deliberately pushing customers to switch to fixed prices,” he explained.
“The borrower gets certainty about what they’re repaying, and we get certainty from our point of view.”
And the strategy seemed to be working. The Committee heard that about three-quarters of the Bank of Ireland’s new loans at the time were in the form of fixed rate loans.
Four out of five mortgages now secured
Fast forward almost five years and fixed rates make up the vast majority of mortgages here.
Fixed rate mortgages now account for over 80% of all new mortgages written, according to the Central Bank.
While the bulk of it is fixed rates of up to five years, banks now offer fixed rates for longer periods.
KBC, Ulster Bank, Bank of Ireland and AIB currently offer fixed 10-year rates, starting at 3.15% for those with a 10% deposit.
Before Money – which entered the mortgage market here last year – recently downgraded its competitors with a 10-year fixed rate of 2.65% (with a 10% down payment).
This is the best 10-year rate currently available on the market.
However, eclipsing Avant’s offering was a relatively new innovation – in the Irish market at least – from non-bank lender, Finance Ireland.
It began offering 15- and 20-year fixed rate mortgages (as well as its own 10-year fixed rate) with rates as low as 2.5% over 15 years (with a loan-to-loan ratio). value less than 60%) and 2.6% fixed over 20 years (also with a down payment covering at least 40% of the value of the property).
With a down payment of 10%, the equivalent rates remain very attractive at 2.95% and 2.99% respectively.
A new start for the Irish mortgage market
Fixed rates with terms of up to 20 years are relatively common in other European countries, but are almost unheard of here.
The Bank of Ireland offered a 20-year fixed rate mortgage at one point in the late ’90s, but that didn’t seem to have had much of an impact on the market at the time.
It is almost certain that it fell through with the rise of the tracker mortgage in the years that followed.
Today, longer-term fixed rates are slowly making their way onto the product menu of lenders.
Trevor Grant, chairman of the Association of Irish Mortgage Advisors, said the Irish market was an outlier in this regard.
He wonders why we have put up with such a high degree of uncertainty about the cost of financing our real estate purchases for so long.
“If a developer told us that the price of a house could be € 300,000 or maybe € 350,000 or maybe even € 400,000 and they could only confirm the price after buying the house , we would run a mile, but we seem to accept the uncertainty about the cost of mortgages.
Rachel McGovern, Director of Financial Services at Brokers Ireland, believes Ireland’s late arrival in providing long-term fixed rates is a testament to the lack of a consumer-centric approach to mortgages here.
“We have always maintained that mortgages are long-term products that lenders can easily find long-term financing for,” she said.
“This makes them very secure – for consumers and for lenders. The fact that they are only now entering the Irish market shows how stilted, unimaginative and above all unconveniently consumer-friendly the Irish mortgage market has been. “
Why does Finance Ireland now offer 20-year fixed rates?
That’s a good question in light of recent rhetoric about inflation and the prospect of higher prices perhaps forcing central banks to raise interest rates to keep economies from overheating.
US Treasury Secretary Janet Yellen recently admitted that US interest rates may have to rise to contain growth, in part thanks to massive stimulus packages to get the US economy back on track after the pandemic.
Similar programs (albeit on a smaller scale) are being rolled out in the euro area, but the European Central Bank does not seem overly concerned about the prospect of inflation.
Philip Lane, former governor of the Irish Central Bank and now chief economist of the ECB, recently said that there was “almost no connection” between the price increases associated with the reopening of the economy and the trend long-term inflation.
In other words, the European Central Bank will not be in a rush to raise interest rates anytime soon.
Finance Ireland needs to take this into account in its long-term thinking and believes it can get money at relatively low rates to make it viable for them while still making it attractive enough to consumers.
It will be interesting to see how other providers react.
“If demand for these products is strong, other lenders will take action to launch similar offerings,” said Joey Sheahan, credit manager at MyMortgages.ie.
“If they aren’t already doing it,” he added.
So what is the logic behind fixing for such a long period if rates are not going to rise?
Two decades is a very long time and a lot can change during that time.
If you look back 20 years ago, it was the pre-financial crash in Ireland. Inflation exceeded 5% and mortgage interest rates reached 6%.
If you had theoretically fixed for 20 years, you would now be getting out of a relatively expensive mortgage compared to what has been available in the market in recent years.
However, the credit landscape has changed a lot these days.
One thing that can be said with enough certainty is that interest rates are not going to go down much.
The base rate at the ECB is after all zero. While rates can turn negative (as they have been with deposit rates), this is unlikely to happen.
For the certainty that a 20-year fixed rate around or below 3% could provide, this is certainly worth considering.
And in light of all the talk about inflation, those who are risk averse might decide it’s worth it.
“When these things turn out, it can often happen quickly and unexpectedly,” said Rachel McGovern.
“That’s why it’s important to be sure what your future mortgage payments will be – normally a household’s biggest expense – and allow people to better plan for their future.”
What if competition drove prices down even further?
It is a separate possibility.
While the ECB’s base rate is at zero, Irish market lenders still have the option of lowering.
After all, we have some of the highest mortgage interest rates in the euro area.
According to the most recent central bank figures, the average interest rate on new loans here in April was 2.8%.
This compares to the euro area average of 1.26%.
Analysts suggest the high rates here reflect the high levels of capital reserves Irish lenders are required to hold, but also the difficulty they have in repossessing a property if the borrower does not pay off their mortgage. .
If these parameters were to change, more lenders could be persuaded to enter the market here, which could lead to lower rates.
Given that Avant has taken the plunge in recent months, this suggests that the market is not entirely unsightly for new lenders.
On the other hand, our record of keeping lenders in the market is not excellent, with Ulster Bank (NatWest) and KBC being the most recent institutions to signal their intention to exit the market here in the years to come.
This reduces the prospects for competition in the medium term.
The verdict on fixing for 20 years
If you like the certainty of knowing exactly how much you would pay each month for the next two decades, the new Finance Ireland product is for you.
There is a reasonably high probability that rates will increase in the coming years, which could make them very attractive in hindsight.
On the other hand, the ECB’s policy rate may stay at zero for many years to come or may return after a temporary period of slightly higher rates.
This, together with some competition in the mortgage market, could lead to further lower rates in the years to come.