Mortgage Rate Increase For Irish Property Owners
Most banking experts believe that Irish house and commercial mortgage variable interest rates will increase shortly. The standard variable rate may rise by 1 or 1.5 percent during 2010.
Previously, mortgage borrowers faced with an increase in the standard variable mortgage rate had the option of transferring to a more competitive rate from another bank. However, many banks have now become very cautious about advancing money for property. If a current borrower is in negative equity, they may refuse to loan the amount required to clear the borrower's current mortgage.
There are three main types of mortgages on the Irish property market:
Fixed rate mortgages, as their name suggests, involve monthly repayments that stay constant throughout the period of the loan. Fixed rate loans set the interest rate at a fixed rate for a period of one to ten years. This type of loan provides little scope for banks to increase revenue in the short term.
Tracker mortgages have their interest rates tied to the interest rate of the European Central Bank, which is currently very low. Tracker mortgages are now no longer available from Irish banks. It may well be that European Central Bank interest rates will increase during 2010, but probably not in the immediate short term.
A standard variable rate mortgage loan is a mortgage in which the interest paid by the house buyer is dependent on fluctuations in the ECB base rate. However, banks and building societies are allowed to increase or decrease the rate. The advantages of a standard variable rate mortgage include the fact that borrowers may repay the mortgage early with no early repayment penalties. Also lump sum payments are allowed, so the mortgage can be paid off early, reducing the total interest that would otherwise be due to the lender. The big disadvantage of the variable rate mortgage is that lenders have the power, within certain limits, to change rates whenever they feel it is necessary.
Banks will feel the need to increase the standard variable rate because they need an increase in revenue. In the past, mortgage lenders were able to borrow money from the other banks on the inter-bank credit market. The cost of wholesale borrowing has now increased substantially and squeezed the amount of money raised from interest rates on mortgages. This has created a major problem for the banks which can be resolved either by reducing the amount paid on savings and deposits or by increasing the variable interest rate charged on mortgages. The latter choice is the option that the major banks may choose to put into practice shortly.
This article is only intended as a basic general summary and you should always seek professional advice where necessary.
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