In a major market innovation in the Irish Mortgage Market, Finance Ireland and Avant Money have introduced new long term mortgages. While longer term mortgages have never really took off in Ireland, they are very popular in other parts of Europe and worldwide. These mortgages can be attractive to borrowers for a number of reasons, but it is important to also consider the potential downsides before making the switch.
One of the biggest advantages provided by long term mortgage products is certainty. Unlike a two or three year fixed term, a 10 or 20 year mortgage will allow your monthly mortgage repayments to remain unchanged throughout the duration of the loan. This reliable and predictable payment can be very helpful when planning out your monthly and yearly personal finances. It also can be very helpful in determining what your home will cost after factoring in interest. With a long term fixed rate, you will be able to know exactly how much the home will cost you right away, while a shorter term fixed rate will change over the lifetime of the loan, potentially leading to a higher cost in total.
Another advantage of fixed term mortgages is becoming more and more relevant given the current nature of the Irish market. When a bank departs the Irish market, as KBC and Ulster Bank have done in recent months, it will sell what’s left of your mortgage to another institution. If this happens with a long term mortgage, your loan will be sold with its existing terms and conditions, meaning that if you’ve locked into a 20 year rate, you will pay the same rate to whatever lender buys your loan.
Another advantage is the possibility of dropping your term and saving on interest payments. In an example provided by the Irish Times, someone on a €300,000 mortgage with 20 years left and a rate of 3.7% could switch to a 10 year loan at a rate of 2.1%. If they stick with their current level of repayments, they could save interest of €68,019 and decrease their term by three years.
The biggest disadvantage of such a fixed term is that interest rates could fall at any point over your term and leave you paying above the market rate for your mortgage. For example, in 2015 Bank of Ireland offered a 10 year mortgage between 4.2 and 4.4% when the lowest market rate was 3.6%. Per The Irish Times, “If you had locked into this at the time, on a €200,000 mortgage your monthly repayments would be €1,001 a month. But if you had stayed on a shorter term, you could now be spending only €769 a month servicing the same mortgage.” You could have taken this extra €232 and put it toward your mortgage, ultimately paying it off sooner.
Another con is that when you enter a fixed mortgage, you reduce your options to overpay your mortgage. But this is something that lenders are working on, and currently Finance Ireland allows borrowers to overpay up to 10% of their mortgage at the end of each year as a lump sum, so €30,000 on a €300,000 mortgage, for example. Avant money is expected to include a nearly identical 10% overpay rule very shortly.
A third disadvantage is that it may be harder for you to move or switch mortgages on a fixed rate, as many lenders charge a break fee to leave a fixed term, which could end up costing you a significant amount of money. This could be a further issue when you consider the fact that most lenders don’t tell you what this fee is up front.