Today we received an email from Haven Mortgages about their updated interest rates, we were pleasantly surprised because for the first time in a long time there were some very attractive long fixed rates. Recently banks have had no choice other than to lash on margin in order to pay for the funds they were securing. The new 10 year fixed rate from Haven is 5.66% it is also the cheapest rate they offer.
What does this mean for a borrower? Well, on one hand we have Trichet saying that he doesn’t see inflation coming under control until 2010 and as the ECB’s only job is to control inflation it would therefore stand to reason that we won’t see a rate cut any time soon. Economists and commentators (myself included) have made some bad forecasts and for that reason I would be prone to feel that the rate outlook is uncertain, at best the current climate is guesswork. This means that a borrower would do well to buy some stability, a way of doing this is by going for a longer termed fixed rate.
Rates (when healthy) tend to be over 5%, the rates we witnessed in the past were historically low, we are still getting used to the new levels in interest rates (many falsely believe they are astronomical) which are only sitting in the region that healthy rates traditionally sat. If you looked at rates over time around 5% is healthy, lower rates normally correlate to a time when economic stimulation was needed and higher tend to be when there were currency runs/issues and huge inflation. Taking all of this into account a 10 year fixed rate of 5.66% looks very attractive.
The title of this article was ‘Will Irish lending turn American’, what was meant by that is the fact that in the USA prime lending tends to be done on fixed rates for up to 30 years, meaning that when you take out your mortgage the price you will pay is set for as long as you have it. The advantage in that respect is that you can budget over the long term as well, because people tend to earn more as their career progresses [even if only due to inflation] the percentage of income your loan represents decreases over time.
ARM (adjustable rate mortgages) are the US equivalent of our variable rates, ARM loans are actually one of the central reasons that sub-prime loans were not paid which lead to the credit crunch in the first place (the actual foundations lie elsewhere but ARM’s are considered a vector to it all starting). In Ireland the stats say that 50-70% of the mortgages out there are on variable rates, this means that we are likely paying way over the odds. The downside of this is that when rates go through an upward trend you get hit harder and harder at the same time as you are getting hit with inflation etc. and it actually compounds the issue. While at the same time it means that paying is easier during a time when making payments is easier (when rates are low money is normally awash in the economy).
For this reason we would feel there is a strong argument for the introduction in Ireland of fixed rate mortgages over longer terms, for instance 10-30 years. They can be funded on the back of long bonds and charged for accordingly, it can also be a win win situation. Banks will win because they will achieve their goals which are profit and to have loans stay on the book. Profit will come from the margin charged and the loan will stay on the book because surprisingly few people break fixed rates. Consumers will benefit because they can get a guaranteed price for their loan which makes it easier for them to budget and as mentioned, it is likely that over time their mortgage payment will be less and less of their salary, as long as rates don’t drop right down they can also prevent being on the wrong end of rate spikes and of course if they drop they could consider re-mortgaging to lock into a lower rate over the long term.
Some fundamental rethinking as to how we do loans in this country is required and I for one am delighted to see Haven leading the way with a rate suite that has such an attractive long term fixed rate.