Prediction for Interest Rates

Man007

Hi

Just wanted to get peoples opinions on how high they think interest rates can go.

I am in the process of deciding between a variable and fixed mortgage and the fixed rates offered do not seem good value at all.

AIB are currently offering 3.29% variable which I don't see changing drastically in the next year and by drastically I mean by more than 2% in a year.

Their 5 year fixed is currently at 5.35% or €451 a month more than the variable which reduces to just over €300 difference when you take interest relief into account.

I have done some calculations and for me to pay more on the variable rates would need to go up by more than 1% every year for the next 5 years.

If they only go up by 1% every year variable is still slightly better so my question is how high do people see rates going bearing in mind the ECB rate has never gone over 5%.

I know theres no right or wrong answer to which to choose and you're buying piece of mind but the variable seems better value to me.

NIMAN

I'd guess the ECB Base Rate won't move too much over the next yr or two. Currently at 1% and the mess Europes in I can't see it being raised too much.

But always remember that banks can increase the mortgage interest rate on their own whim, so that can change independently of the ECB rate.

The banks also build in a harsh 'ability to pay' stress test into your application, so they will do calcs to see if you could still afford the mortgage should it hit an extra 3 or 4%.

howamidifferent

Man007 wrote: »

Hi


AIB are currently offering 3.29% variable which I don't see changing drastically in the next year and by drastically I mean by more than 2% in a year.

Their 5 year fixed is currently at 5.35% or €451 a month more than the variable which reduces to just over €300 difference when you take interest relief into account.

If you can afford the 5 year fixed, then take the variable and put away the 451 euro difference each month. Then if the variable rates rise you have your cushion set aside to make the increased payment. If they dont rise then your quids in. Banks have already factored any likely rate changes into the fixed rate so its unlikely you'll beat them by chosing this option, plus if you need to leave a fixed rate you'll pay a large breakage fee...Stick with variable and bank the difference for the 5 years...

killers1

I'd opt for the variable option if I was you (it should be 3.24% as opposed to 3.29%?) There's just too big a gap between the fixed & variable options at the moment... ECB rates don't appear to be increasing anytime soon and would take a lot of increases to end up paying higher on the variable rate than the fixed rate of 5.35% over the next 5 yrs... Glad to see the 'buying peace of mind' mindset!

AIB are currently stress testing applications for homeloans @5%.

Marcusm

ECB rates are irrelevant in relation to 5 year rates although the recent provision of term (2-3 year) funding from the ECB has continued to suppress interest rates. EUR interest rate curve stays below 1% up to 5 years and rises fairly strongly thereafter. McWilliams would be of the opinion that interest rates in the EUR zone will rise significantly in advance of that.

Man007

killers1 wrote: »

I'd opt for the variable option if I was you (it should be 3.24% as opposed to 3.29%?) There's just too big a gap between the fixed & variable options at the moment... ECB rates don't appear to be increasing anytime soon and would take a lot of increases to end up paying higher on the variable rate than the fixed rate of 5.35% over the next 5 yrs... Glad to see the 'buying peace of mind' mindset!

AIB are currently stress testing applications for homeloans @5%.

Apologies 3.29% my mistake do you work for them killers cheers for the advice pretty much confirmed what I was thinking I went with variable today anyway and can fix in future also have the option of increasing payments each month to reduce term which is attractive

killers1

Man007 wrote: »

killers1 wrote: »

I'd opt for the variable option if I was you (it should be 3.24% as opposed to 3.29%?) There's just too big a gap between the fixed & variable options at the moment... ECB rates don't appear to be increasing anytime soon and would take a lot of increases to end up paying higher on the variable rate than the fixed rate of 5.35% over the next 5 yrs... Glad to see the 'buying peace of mind' mindset!

AIB are currently stress testing applications for homeloans @5%.

Apologies 3.29% my mistake do you work for them killers cheers for the advice pretty much confirmed what I was thinking I went with variable today anyway and can fix in future also have the option of increasing payments each month to reduce term which is attractive

It was a bit if a no-brainer really for you to decide between the rates. I don't work for AIB, I'm a Mortgage Broker so very familiar with their rates & Credit Policy. Best of luck with your purchase!

Slydice

For what it's worth, David McWilliams posted a blog today saying he reckons Interest Rates are going up:
http://www.davidmcwilliams.ie/2012/03/12/year-of-the-central-bank
Quotes selected by me that you might find interesting:

Today, the balance sheet of the ECB is 30 per cent of eurozone GDP.

Now here’s the rub. What goes in must come out. As all this cash finds its way ultimately into asset prices and inflation, the central banks will have to take it back out of the system because they can’t countenance mass inflation.
So what will they do?

The will raise interest rates rapidly and maybe much more rapidly than we expect.

What would happen here, if real interest rates in Europe went up to 5 per cent to choke off inflation? After all, don’t forget that savers in Germany would benefit from this. Here would be chaos, mass default, bank failure and another credit crunch, but this time on a much greater scale.

A whiplash in interest rates is not remote, in fact, it is quite likely. Given the fragility of our banks, the state of their mortgage books and the fact that people can’t take any hikes in interest rates, the lesson from Greece is that we’d better position ourselves for higher – not lower – interest rates.

antoinolachtnai

Would the following be practical for you?

Take the variable rate.

Make extra payments to the value of the extra it would cost you to take the higher fixed rate.

Then if rates go up, it won't be a shock to you, and if they go really high, or if you face a crisis of some sort, you will have a cushion as a result of having made extra repayments.

Man007

antoinolachtnai wrote: »

Would the following be practical for you?

Take the variable rate.

Make extra payments to the value of the extra it would cost you to take the higher fixed rate.

Then if rates go up, it won't be a shock to you, and if they go really high, or if you face a crisis of some sort, you will have a cushion as a result of having made extra repayments.

Yes this may be an option as we fully intend on paying more than standard repayments to reduce the term however with renovations and furniture etc it probably won't be an option for the first year.

killers1

Man007 wrote: »

antoinolachtnai wrote: »

Would the following be practical for you?

Take the variable rate.

Make extra payments to the value of the extra it would cost you to take the higher fixed rate.

Then if rates go up, it won't be a shock to you, and if they go really high, or if you face a crisis of some sort, you will have a cushion as a result of having made extra repayments.

Yes this may be an option as we fully intend on paying more than standard repayments to reduce the term however with renovations and furniture etc it probably won't be an option for the first year.

Get your keys, move in and enjoy doing up the house the way you want it! Make the repayments at the required level and review it in a year or two's time. If you can afford overpayments at that stage then increase your repayment to reduce the term but not at the expense of being able to put money away monthly that you might need to access for any unexpected bills or once off expenditure that crops up from time to time...