In the ever-changing landscape of mortgage rates, homeowners now face unparalleled challenges. Since the European Central Bank (ECB) began raising rates in July 2022, tracker mortgage holders have borne the brunt of these rates and experienced considerable financial strain. They are now faced with a dilemma: Should they stay the course or switch to a fixed rate? The decision, though, is not straightforward and demands meticulous consideration.

The Tracker Mortgage Landscape

In 2005, when many homeowners secured their mortgages, the ECB rate they tracked stood at 2%. Fast foward to 2023, and the ECB's main lending rate now stands at 4.50%. Those with tracker mortgages, paying a margin of 1 percentage point, saw their mortgage rate quickly rise to 5.5%, placing immediate pressure on their finances. This increase translates to an approximate rise of €12 to €13 per month for every €100,000 remaining on the tracker mortgage. As a result of all the increases since last July, individuals with an outstanding balance of €200,000 over 10 to 15 years are now burdened with repayments soaring over €400 monthly.

While there were warnings about potential rate hikes well before they began, not all borrowers took heed. Some opted for fixed rates when attractive offers were on the market, providing a buffer against future uncertainties. However, many of these fixed-rate options were short-term, leaving borrowers vulnerable to higher rates when these expire. The current situation forces borrowers to evaluate two critical factors: the affordablity of their current interest rate and the future trajectory of rates.

Should You Fix Your Tracker Mortgage?

The decision to fix your tracker mortgage is complex. When considering your decision, it is advisable to take into account the advantages and drawbacks of switching from a tracker to a fixed rate mortgage. It is also prudent to consider certain crucial factors before making your decision.

a) Advantages

• Stability and Predictability - An advantage of abandoning your tracker mortgage for a fixed rate mortgage lies in the stability and predictability you will enjoy with a fixed rate. Fixed rate mortgages offer a lifeline amid rising uncertainty, which can be worth a lot to mortgage holders. Opting for a fixed rate ensures that the mortgage payments remain consistent, guarding homeowners against the fluctuations of interest rates that characterise tracker mortgages.

Proponents of tracker mortgages would argue that holders stand to enjoy the immediate benefits of a decrease in rates. However, it is important to acknowledge the flip side i.e. when ECB rates rise, your tracker rate also increases. Rate changes are difficult to predict and a lot can happen over the term of your mortgage, so you could be putting yourself in a financially vulnerable position by choosing to stick with your tracker.

b) Disadvantages

• Potential Loss of Future Benefits - The decision to switch to a fixed rate is not without its drawbacks. Tracker mortgages could potentially offer relief when interest rates eventually fall. However, if you lock into a fixed rate while rates are high, if the rates come back down you will be stuck paying more than the market average until your fixed period ends.

• Giving up Ability to Make Overpayments - Another disadvantage of a fixed rate motgage is that you may face having to pay a fee or penalty if you want to increase your monthly repayments at any stage. For instance, if you were to receive a lump sum and intend to apply it towards paying off a portion of your mortgage, you might incur a fee for doing so.

With a fixed rate mortgage, you are limited to a fixed repayment amount on a monthly basis for the fixed term. You may be charged a fee or penalty when you exceed the fixed repayment amount. Nevertheless, there are strategies to address this issue, and it is advisable to explore them in consultation with a professional advisor.

c) Abandoning Your Tracker: Crucial Factors

• Length of the Loan Term: The remaining term of the mortgage plays a pivotal role in your decision-making process. A shorter term might warrant the switch to a fixed rate, providing immediate stability. For instance, if you have just five years left on the term of your mortgage, you might benefit from giving up the tracker and lock into a five-year fixed for the certainty it gives you. However, a longer remaining term is possible, as many tracker were initially issued over 40 years, with the final products sold around 2008. This implies that some tracker mortgage holders might still have a 20-year term remaining. In such cases, adopting a long-term perspective is crucial when making your decision.

• Tracker Margin and Current Financial Situation: Understanding the tracker margin is crucial. Your current margin is the ECB rate + margin, which is information you can ascertain from your latest mortgage statement. High margins over the ECB rate could lead to substantial rate increases, making fixed-rate options more attractive. Additionally, assessing current financial stability is vital. If the rising rates strain finances, fixing the mortgage might provide much-needed relief.

Ultimately, if you are going to give up your tracker, you should have a strategy. Are you going to consolidate your mortgage debt down to a new term, for example, and will the certainty of a fixed rate help you plan for college expenses or retirement, etc.? If you are giving up your tracker for a three-year or five-year fixed rate now, it does not necessarily make sense to do so unless you are under severe financial pressure. You might have a short-term gain, but then have the equivalent of 12 years left on your mortgage, and then you are at the mercy of whatever lenders are charging at the time. Once you give up your tracker, it is gone and all lenders are clear on that.

• Future Interest Rate Trends: Predicting future interest rates is a nuanced undertaking, requiring an understanding of historical economic patterns. If indicators from past trends were to suggest a potential plateau or decrease of current interest rates, that would be great for tracker mortgage holders as it would make trackers advantageous once again. However, a substantial decrease in interest rates in the immediate future seems improbable.

After the 2008 global financial crisis, there was a period of unprecedented interventions where the ECB implemented historically low interest rates to stimulate economic growth and stabilise the financial system. Preceding these interventions, mortgage interest rates in Ireland soared to staggering levels, reaching up to 13.99% in the 90s and even surpassing 15% in the 1980s. In our current landscape, prevailing interest rates can be viewed as a correction from abnormal conditions of the last decade or so.

Current market predictions indicate that ECB interest rates are likely remain above 4% until 2024, possibly levelling out between 3% and 4% in 2025. Therefore, assuming a swift return to historical interest rate levels may be overly optimistic.

Exploring Fixed Mortgage Options

If you do consider giving up your tracker mortgage, it is likely that you will be looking at fixed-rate options. Fixed-rate mortgages are enticing in a volatile interest rate market. However, choosing the right rate and duration is key to making the right choice.

While opting for a 5-year fixed rate offers stability, it may not be the best option for those with a shorter remaining mortgage term. Choosing to switch to a shorter-term fixed rate product exposes you to the prevailing rates offered by lenders once that term concludes. It is important to note that lenders are not obligated to implement ECB rate changes. Therefore, if market rates are competitive, switching to a short-term fixed rate could prove advantageous. On the other hand, in a scenario where ECB rates decrease while lenders maintain their rates, switching to a short-term fixed rate could lead to a costly mistake. You should carefully consider this potential outcome before deciding what to do with your tracker, especially if recent rate increases are manageable for your household.

If you decide to fix your tracker, there are two options available: to fix with your current lender or switch and fix with a new lender. If you elect to fix with your current lender, you may end up paying more than you should. You should ensure that you find the best available offer in the market, and that your switch is not costly because you will already incur legal fees during the switching process.

Should Property Investors Abandon their Trackers?

Tracker mortgages were once the preferred option for small property investors and in the current interest rate climate, they remain the best choice. If you are on a tracker mortgage for an investment property, it may be prudent to retain it because the prevailing rates for investment properties are currently above 6%, surpassing the rates for tracker mortgages. Furthermore, interest on investment mortgages is tax deductible, so it may not impact investors as much. Holding onto a tracker mortgage for an investment property may have greater financial benefits compared to alternative mortgage options.

Seeking Professional Guidance

Given the intricacies involved, consulting a professional mortgage specialist is invaluable. Mortgage specialists can assess individual financial situations, evaluate available options, and provide tailored advice, guiding you through this labyrinth of choices.

The decision to switch from a tracker mortgage to a fixed rate requires tracker mortgage holders to carefully consider their individual circumstances, weigh the advantages and disadvantages of fixed-rate options, and factor in future predictions of interest rates. Seeking guidance from mortgage specialists is crucial in navigating this complex decision-making process. Ultimately, the choice made today will significantly impact your long-term financial goals, which is why it is important to make an informed decision.