Larger Mortgages available for Fixed Rate Borrowers

The_Conductor

Very interesting article in todays Business Post:

Borrowers can take out far larger mortgages if they borrow at fixed rates for five years than if they borrow at variable rates, according to mortgage brokers.

The anomaly arises because lenders do not have to test the ability of borrowers to cope with rising interest rates if they take a five-year fixed-rate mortgage.

However, lenders must test the ability of borrowers on variable mortgages to see if they can cope with rising interest rates.

Michael Dowling, president of the Independent Mortgage Advisers Federation, explained that a typical borrower could get a €340,000 mortgage if he took out a five-year fixed-rate mortgage at 4.95 per cent APR, whereas he could get only a €280,000 mortgage if he chose a variable mortgage of 4.75 per cent.

That is because the Financial Regulator requires lenders to test the ability of borrowers on variable mortgages to cope with a 200 basis point rise in interest rates.

That means that lenders must test the ability of a borrower taking out a variable mortgage at 4.75 per cent to meet his mortgage repayments if interest rates rose to 6.75 per cent.

Given that many borrowers would not be able to cope with those higher rates, the amount that can be lent to those borrowers will often be constrained.

However, the stress test requirement does not apply in the case of borrowers taking out five-year fixed mortgages as they are protected from rising rates during the fixed period.

Other banking sources have confirmed that many lenders and mortgage brokers are now encouraging borrowers to fix for five years in order to be able to borrow more.

garrettod

Hi

While the above is true and has been known in the industry for sometime, be careful .... if you fix your interest rate & late have to break out of it early for some reason, there may well be a penalty !

antoinolachtnai

Generally speaking, you will end up paying more interest on a fixed rate mortgage than a variable rate.

daveirl

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antoinolachtnai

No, fixing is an extra service that you are going to end up paying a premium for. The bank is taking on extra risk and extra administration work in order to provide a variable-rate loan and has to be compensated for that.

BobbyD10

garrettod wrote:

Hi

While the above is true and has been known in the industry for sometime, be careful .... if you fix your interest rate & late have to break out of it early for some reason, there may well be a penalty !

generally there will be a penalty all right for breaking out from a fixed rate contract....

However, if ye kick up enough stink, threatening moving or switching your mortgage ye may get away without paying that penalty...

The_Conductor

Banks do not borrow money at overnight rates in order to create liquidity for the purpose of funding mortgage disbursements. They have access to alternate funding arrangements (well- they did until the financial markets went into meltdown last week). There is greater security from the banks perspective in a fixed rate product- as they are able to see exactly what the return on their investment actually is. That said- depending on what happens with interest rates- a floating rate product may actually be more profitable for them. Once again however- its a case of looking into a crystal ball- its simply not possible to say definitively one way or the other- that one is better off with one product over and above a different product. Time will tell.

daveirl

This post has been deleted.