Thursday, 9 April 2009

Should banks allow penalty-free breaks from fixed rates?

As anyone with a variable or tracker variable rate mortgage will gleefully tell you, the European Central Bank (ECB) have slashed interest rates repeatedly since October 2008, down to their current low of 1.25%.

But this will be of no use to someone who is on a fixed rate mortgage, where the repayments are fixed for an agreed period of time. If you attempt to break out of a fixed rate, you must pay a substantial penalty, which generally renders the exercise worthless.

I usually hold the opinion that if you enter into a contract with your eyes open, you must deal with the consequences if it doesn't go your way.

But on this issue, I feel there is some merit in a proposal for a once-off amnesty where owner-occupier mortgage-holders get a brief "window" of time to break out of a fixed rate entered into prior to October 2008 without penalty.

In Brian Lenihan's Budget speech, he said "The Government has decided that from the 1st of May, Mortgage Interest Relief for principal private residences should only be available for the first seven tax years of the mortgage. I believe this move is justified given the significant recent reduction in interest rates and in house prices."

He is using the rate decreases as a justification for a reduction in TRS, but those on a fixed rate don't benefit from such decreases.

The ECB rate cuts were designed to stimulate the economy, but this aim will be diluted by all those on fixed rates.

As has been said before, these are unprecedented times - perhaps there is scope for one more unprecedented action?

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