To keep tracker or not to keep tracker

veryangryman

Ok guys - very short and to the point...

ECB say todays interest cut is the last. Perhaps a bluff but who knows

Is there value in now grabbing a low fixed rate on the Mortgage in the light of signs of economic recovery (and thus increases in rate in the next quarter). At the moment, im 60-40 in favour of trying same

Opinions?

brettmirl

Am no expert on it, but I'm keeping my tracker for the moment anyway.

uberwolf

what kind of fixed rates have you seen available?

your argument makes sense, the caveats are around possible changes in margin and rolling off on to a variable rate which will be much higher than the tracker rate as it is at the discretion of your bank.

dotsman

veryangryman wrote: »

ECB say todays interest cut is the last. Perhaps a bluff but who knows

Trichet didn't say that. In fact, it has been hinted (and expected by most) that there will be at least another 0.25 drop in the next few months.

The main question here is what happens after they finished dropping? Will they remain at this extremely low level for months/years? When they begin to increase, how fast, by how much and at what level do they stop increasing?

I guess it depends on your tracker, but mine is ECB + 0.75. So, as of this month, I'm on 1.75%, and probably dropping to 1.5% soon. The best 1-year fixed is more than 2.5%. Now, I cannot envisage any economic situation that could occur over the next year to suggest to me that I would save money by switching to the 1-year fixed rate.

With regards long-term fixed rates, the problem is nobody has a clue where interest rates will be in a years time, let alone in 5 years time. So rather than trying to gamble, which so many did over the past few years (and are now playing the victim because they're stuck on the fixed rate - how many would be complaining if things had reversed, interest rates had shot up, and the banks turned to them demanding that they go onto variable?), you should use fixed rates like they are supposed to be used - Maximums.

Basically, a maximum rate is one that, if interest rates where to exceed it, you would struggle to pay your mortgage (anything under it, you can afford - obviously the cheaper the better, but you can afford it regardless). Next, you look at the likelihood of that maximum rate being breached over the next few years. Then take a look at available fixed rates. Say, for example, your maximum rate was 4% and that if the rate was to ever exceed that over the next few years, you would be in serious trouble.

Looking at AIB's current rates (as at 09/05/2009)

1 Year Fixed (Existing Bus.) | 2.85%
2 Year Fixed | 2.80%
3 Year Fixed | 3.10%
4 Year Fixed | 3.45%
5 Year Fixed | 3.69%
10 Year Fixed | 4.41%

in this situation, I would suggest looking at the 5 year rate. By agreeing to pay 3.69% (a lot more than you are currently paying, but still very affordable as it is under the 4%), you can guarantee that you won't have to worry about interest rates for at least 5 years (and hopefully by then, your finances have improved and you can afford higher than 4%).

If you do opt for the the 5 year rate, it will certainly be expensive for the first while (whether it is expensive or in fact beneficial in a few years remains to be seen), but that is the price you pay for the comfort.

Getting a fixed-rate is just a form of insurance. It is a safe guard against your personal worst case scenario with regards interest rates. You shouldn't try to make a profit out of it (gambling), as more than likely, you will lose.