# Locking in fixed rates before interest rate hikes could save you tens of thousands of dollars

A first-time home buyer (FTB) could save tens of thousands of dollars in the first ten years of their mortgage by locking in a fixed-rate mortgage before any interest rate hikes, according to figures from mortgage brokers, Dowling Financial. Savings could even be made if interest rates do not rise.

## Repair to save

Let’s say you’re an FTB borrowing $300,000 over 30 years to buy a house worth $350,000. Some of the cheapest mortgages available to you are ICS Mortgages’ variable rate of 2.7% (if you get a variable rate) or Avant Money’s ten-year rate of 2.4% (if you get a variable rate). ten-year fixed rate).

Your monthly repayments currently stand at around €1,170 under the ten-year fixed rate of 2.4pc and €1,216 under the variable rate of 2.7pc, according to Dowling Financial. Thus, even if interest rates remain unchanged for the next ten years, you would save around €5,500 over the first ten years of your mortgage by opting for the ten-year fixed rate of 2.4 pc at the start, rather than the variable rate of 2.7 pc, according to Dowling Financial.

## If rates go up half a percent

The savings to be gained with the ten-year fixed rate would be even greater if the ECB rate – and therefore the variable mortgage interest rate – increased during the first ten years of your mortgage.

Let’s say you took out your mortgage on February 28, 2022. On that date, the cheapest variable mortgage available to you was the ICS Mortgage rate of 2.7%, while the ten-year fixed rate mortgage the cheapest was Avant Money’s ten-year rate of 2.4. pc. Let’s say the ECB rate and in turn your variable mortgage rate increases by 0.5 percentage point six months after your mortgage starts (bringing your variable rate to 3.2pc) – then stays at that rate for the next nine and a half years of your mortgage.

If you had locked in the ten-year fixed rate on February 28, 2022 instead of opting for the variable rate of 2.7pc initially, you would have saved around €14,750 in interest over the first ten years of your mortgage. 30 years, according to Dowling Financial.

## If rates go up one percent

Let’s say you took out your mortgage on February 28, 2022, and the variable interest rate increases by one percentage point (from 2.7 to 3.7 percent) per year in your mortgage – then stays at that rate for the next nine years. If you had initially locked in the ten-year fixed rate of 2.4% instead of opting for the variable rate, you would have saved around €23,200 in the first ten years of your 30-year mortgage, according to Dowling Financial.

Indeed, the interest savings in the first ten years could be even greater than those numbers, because you typically pay more interest in the early years of a mortgage than in the later years, according to Dowling. This is because the outstanding balance of your mortgage decreases over time and therefore the amount of interest you pay also decreases. “In a 20-year mortgage, it would usually take you the first 12 years to pay off half the principal [the original amount borrowed] and the following eight years to repay the other half of the capital”, shelp Dowling.

## How to limit the blows that higher interest rates could bring

**TOP TIPS: INTEREST RATES ARE HITTED BE CAREFUL OF BONDS AND COMMERCIAL PROPERTY**

“People should assess the amount of bonds they hold in their portfolios,” said Brian O’Reilly of Mediolanum Asset Management. “If interest rates rise, bond yields generally rise as well, causing bond prices to fall. Thus, even “safe haven” government bonds could be negatively affected by rising interest rates. »

In the case of stocks, bond proxies (stocks likely to offer safe and predictable returns) tend to be most affected by

rising interest rates, O’Reilly added.

Commercial real estate investments and utility stocks could be hit by rising interest rates, according to O’Reilly. “Real estate will likely be more difficult if interest rates rise, as real estate transactions could become more expensive,” O’Reilly said.

**GET A FINANCIAL CUSHION**

“Given rising interest rates, it’s worth sitting down and looking at your finances, especially your discretionary spending,” said AIMA’s Trevor Grant. “See if there are areas where you could cut costs if you needed to. You might find that there’s an extra $50-200 a month you could save if you tightened your belt. Put that money aside now, as it will reassure you in case rates rise.

**SORTING OUT PROBLEM DEBTS**

Wipe out or reduce any expensive or large debt you have (such as credit cards, overdrafts, car financing, or personal loans) before any interest rate hikes if you can – because that debt could become more expensive if interest rates rise. For the same reason, try to pay off any mortgage arrears you accumulated before or during the pandemic.

“Now is an opportunity for people who have expensive short-term debt to see if they can renegotiate that debt into a cheaper form – or if they have money on deposit, to use some of it to settle credit card bills or other costly debts. said Michael Dowling of Dowling Financial.**CHECK YOUR PENSION**

Annuities generally offer better value when interest rates rise, but don’t expect your pension to increase dramatically as a result. “Although your purchasing power increases if interest rates rise and you buy an annuity, your retirement portfolio may lose value, depending on the type of bonds you hold. [in it] – so the gain outweighs the loss,” said Peter Griffin, director of APT Workplace Pension. “Higher interest rates could potentially put pressure on defined benefit plans.”

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