Fixing your mortgage rate

How long should
I fix my deal for?

If you are looking for a fixed rate mortgage, the first thing you should think about is how long you would like to fix your mortgage for. It’s important that the length of this fixed period suits both your financial and personal circumstances.

Fixed period

The mortgage term and the fixed period are separate things. The mortgage term is the entire length of the mortgage, for example 30 years The fixed period relates to the length of your current mortgage deal, such as 3 years. Once you finish your fixed period you automatically revert back to the banks standard variable rate, you can switch to a fixed rate again at this point of you choose but this will be dependent on your financial circumstances and the interest rate will depend on the current market conditions which may be better or worse than today’s market conditions. In the case above if you finish your 3-year initial mortgage deal, you would still have 27 years remaining on the mortgage terms.

How long can your fixed rate period be?

Fixed rate mortgages can range from 2 to 10 years

How would this term affect me financially?

Shorter deals tend to have the lowest costs, in fact in the short term a variable rate is always cheaper. The fixed rate mortgages are made slightly more expensive as lenders take into account the risk that the standard rate will increase whilst you are on a fixed rate. This means it could cost more money for the bank to provide the mortgage whilst your payments don’t increase.

The standard variable rate is a better reflection of the banks cost of providing a mortgage and as a result is cheaper. The reason it’s cheaper is that the banks can increase the amount you need to pay each month if their cost of providing the mortgage increase. If you opt for a fixed rate a bank cannot increase your mortgage repayments regardless of any changes in market conditions. As a result, they make fixed rate mortgages slightly more expensive than variable rate mortgages to take this risk into account. Generally, the longer the fixed term the higher this premium will.

A 10-year deal gives you a lot of certainty, it protects you against any increase in the interest rate. In the current environment I think most people would be delighted if they could fix their rent for 10 years. The downside is that if a lower interest rate becomes available you may not be able to take advantage of it. There is a breakage charge for a fixed rate mortgage, a 10-year mortgage isn’t just certainty for you it’s also certainty for the bank. As a result, if you’re circumstances change and you need to come out of the deal before it ends you could be looking at some additional charges. 10-year fixed rates a relatively rare and all lenders don’t offer them most people are fixing their mortgage term for between 2- 5 years.

Cost of Credit

As mentioned above the shorter the mortgage term the more you pay month but the less you pa y overall. The cost of capital is the amount of interest you pay on your mortgage loan.

For example, if you took out at a mortgage of €200,000 for 35 years at and your cost of credit would be €123,274, assuming an interest rate of 3%, and your monthly repayment would be €769.

The same loan paid back over 25 years would result in a monthly payment of €948 but your cost of credit would only be €84,526.

If you can pay your loan off 10 years earlier you would save nearly €40,000. Now it’s not always practical to make the monthly repayments, but if it’s possible the savings from paying off a mortgage early can be significant. We go into more detail on ability to repay here.

The Competition and Consumer Protection Commission has an excellent calculator that shows the total cost of a mortgage and how they vary depending on your mortgage term.

How would this term affect me personally?

Before you decide on how long to fix your mortgage, you should talk to your broker to evaluate your options.

Things you should think about including:

  • How long are you planning on staying there? Is it a starter home or somewhere you can see yourself living for the rest of your life?
  • Are you planning on selling this home in a few years?
  • Are you planning on marrying or starting a family?
  • Do you think you will be earning more money at work?
  • Are you expecting any other changes to your financial circumstances in the coming years?
  • The cheapest mortgage on paper might not necessarily be the most practical. It’s worth thinking about some of the points above and running through them with a broker.

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