No more pain from rising mortgage interest rates
LLast week, Avant Money, one of the cheapest mortgage providers in the market, announced that its rates were up.
It is the second bank to report a rate hike this year, leading some commentators to conclude that the golden age of low mortgage rates is coming to an end.
Avant raises its five-, seven-, and ten-year rates up to 0.30%. The five-year fixed rate for first-time buyers with a 10% down payment increases from 0.20% to 2.40% while the 10-year rate will increase from 0.30% to 2.70%.
In March, ICS Mortgages announced increases to its three- and five-year fixed rates. For those looking for loan-to-value (LTV) rates of 80% or less, the three-year fixed rate has dropped from 2.20% to 2.45%, while the five-year fixed rate has dropped from 2.20% to 2.60%. Not huge jumps, but not so small either.
At the time, Ray McMahon, commercial director of ICS Mortgages, said the fixed rate increases reflected strong upward pressure on the cost of funding fixed interest rate products in international markets.
“This is the result of considerable rate movements in capital markets due to inflationary pressures felt in Europe and globally,” McMahon said.
It was in March. Since then, the Federal Reserve, which is the central bank of the United States, has raised its rates from 0.5% to 1%. It was the first time the Fed raised rates by more than 0.25% at once since 2000.
In Britain, meanwhile, the Bank of England’s monetary policy committee has hiked rates four times to 1% since last December. As things stand, these rates should continue to climb and should reach 2% before the end of the year. The Australian and New Zealand central banks have recently raised their interest rates.
It’s all down to inflation, which is now a global phenomenon. In the United States it has already reached 8.5%, a 40-year high, while in Britain it is expected to double by the end of the year. A 10% inflation rate has not been seen there since the 1980s.
The European Central Bank (ECB) has been slow to react to these mounting pressures.
Many central banks have mixed policy objectives. The Bank of England, for example, is targeting an inflation rate of 2%, but will also support the government’s growth and jobs targets. In the United States, the Federal Reserve is also focused on weak employment and economic growth in addition to controlling inflation.
The ECB, however, has an explicit objective: price stability. This he defines as an inflation rate close to, but just below 2%.
Deflation – i.e. falling prices – is often as damaging to an economy as inflation, because in a world of falling prices, consumers postpone spending in hopes of obtaining goods and cheaper services down the line, which in turn depresses economic growth. Until recently, the ECB was more concerned about falling than rising prices, which is why it lowered its key interest rate to 0%.
Currently, the ECB’s overnight deposit rate stands at -0.5%. Concretely, this means that the other banks have to pay for the privilege of the ECB to hold their liquidity reserves overnight.
The ECB was very slow to react to the rapid rise in inflation as underlying economic trends remained weak and the price spike was seen largely as the result of short-term increases in fuel prices . But that view is starting to change.
We know this because the ECB recently confirmed that it will conclude its asset purchase program in the third quarter of the year. It was a long-standing bond-buying initiative that aimed to increase the money supply and boost lending across the EU. Furthermore, we are hearing more and more reports from hawkish members of the ECB who see the inflationary spiral as more than temporary and are eager to start using interest rates to counter it.
Eurozone inflation is now at 7.5%, more than three times the ECB’s target, and its highest level since the euro’s inception more than two decades ago.
In this environment, mortgage holders who are not bound by fixed rates need to re-examine their options.
Noting the Avant Money announcement last week, Trevor Grant from the Association of Irish Mortgage Advisers said: “If people put off the repair or change until now, they have no excuse. This will probably be the first of a series of increases.
He points out that you can always fix between 25 and 30 years at less than 3% with at least two lenders, and that these products offer flexible excess payment facilities.
“Rates have been at historic lows for some time and educated mortgage holders should consider their options to lock in and protect against future rate increases that are inevitable,” he said. “Even those with existing fixed agreements should ask their lender if there are any breakage fees to be settled with the same lender or elsewhere.”
You pay a break fee if you want to withdraw from a bad value fixed or trailing contract. Before you do this, be sure to do the math and make sure it’s worth it.
In recent years, more than 80% of new mortgages have been set for three or five years. Longer-term fixed rates should now be considered, says Grant “as long as the full features of the product are clearly understood.”
These developments come on the heels of the release of two surveys examining how we are responding to the rapid onset of inflation.
A survey by Taxback.com revealed, unsurprisingly, that 90% of us are feeling the effects of soaring fuel prices.
The company’s Barry Cahill says its survey found that spending less was by far the most popular action people are considering to take to limit the impact of rising prices.
“This will have a ripple effect on the wider economy, particularly at a time when businesses are trying to recover from the pandemic. A quarter of people said they would look to save more, and one in 10 thinks she will seek financial help and/or advice from a friend or family member, lender or financial expert.
Interestingly, seeking a pay rise is only seen as a basic solution by one in ten respondents.
At the same time, insurance company Royal London Ireland released a survey which found that more than a third of people would find it difficult to open up about their financial problems, with more men (38%) taken with this than women (33%).
The company’s Karen Gallagher points out that this is particularly relevant in the context of the spiraling cost of living. She said: “People’s personal and family finances have to stretch more than ever. It’s important to have someone to turn to, or someone to turn to, when it comes to money-related stress.