Ever hear of a split mortgage? Third option for homebuyers in fixed vs variable debate

She was borrowing €400,000 over a 20 year term and her loan to value was going to be about 85%.
She was looking at one option from one of her lenders  who happened to be Bank of Ireland. Amongst their different offerings, the one that got her attention was their 4 year fixed rate which was, 3.1%
And if she chose this rate her monthly repayment would be €2,240.
The other lender she was in discussions with was Avant Money.
She had approval with them and the rate that was catching her eye with them was a variable rate at 3.18%. If she chose this option, her monthly repayment would be €2,256.
So, there was only €16 of a difference but she wasn’t comparing like with like, because one rate was variable and the other fixed.

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Both of them were the most competitive rates in their respective categories so she did well with securing approvals from both of these particular lenders, so it was all good.
She was leaning towards the variable rate because (a) she could make overpayments on the amount she owed at any time without incurring any penalties and (b) she could move to other products which included fixed rates at any time if she wanted to and (c) Avant were giving her certainty over what margin they would apply to their benchmark rate and they were guaranteeing that margin for the term of the mortgage.
And that margin above their benchmark rate was going to be 1.10%.  
So, what’s their benchmark rate?
Their benchmark rate is based on whatever the 12-month Euribor rate is at the date of the drawdown of her mortgage.
So, if this rate for example is 2.20%, then the rate she is going to end up paying is 3.30% because it’s 2.20% plus the margin Avant applies which as I said is 1.10%.
It’s very much like how the tracker mortgages were constructed in the past where they were part fixed (the margin) and part variable (the benchmark rate).
What happens every year with Avant is that on the anniversary of when your mortgage was issued, they will re-calculate the variable rate based on the 12 month Euribor rate.
And that means in 12 months’ time if that rate is say 2.90% then the rate she will be paying for the next 12 months will be 4%.
And if in 12 months’ time that benchmark rate is 1.85%, then the rate she will be paying for the next 12 months will be 2.95%.
The next 4 years could look something like this for her, based on borrowing €400,000 over 20 years:
Year Benchmark Rate Margin Total Rate Monthly  Repayment
1 2.20%    1.10%    3.30%    €2,279
2 2.90%    1.10%    4.00%    €2,423
3 1.50% 1   .10%    2.60%    €2,139
4 2.50% 1.10% 3.60% €2,340
You can see how the monthly repayment can change. In this example the rate after the first year could increase by 0.70% and a year later it could fall by 1.40% and then a year later it could increase by 1%.
You just don’t know with any degree of certainty what your rate will become for the following 12 months until the previous 12 months are up and that will happen every year. So, there may be years when you are lucky and rates are lower and equally you could be unlucky if rates are higher and these are all things that are beyond your control.
At the time of writing this, I looked at what the 12 month Euribor rate has over the past year and timing really is a big factor because if your 12 months happened to be up for renewal on for example the 9th of February of last year the rate then would have been 3.072% so your rate from February ’24 to March ’25 would have been 4.172% (3.072% + 1.10%).

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But the good news is that a year later the Euribor rate would have been c. 2.057% so your rate for the year ahead would have been 3.157% which would have been about 1% less than what you had been paying.
But who knows what it will be in February of next year and it could be higher or lower, you just don’t know and there are too many external variables that you have no control over to even hazards a guess.
Which is why now I think is a good time to start talking about fixed and variable rates because I think talking about them out loud might help make up your mind if you are like the women I have been telling you about.
And before I do, my advice to her was to ask herself a, what if question?
What if rates did increase by 1% in a years’ time? Would she have the capacity to absorb that increase. If she was paying say €2,139 for 12 months and that suddenly went up by €201, would she be able to meet that extra amount?
What if rates went up by 1.50%
And what if rates went down by 1.50%, what would that saving mean to her.
Was she prepared to take that gamble and have that uncertainty ever year which could turn out great for her particularly if rates went down and ended up being below that fixed rate of 3.1% she could have taken?
Or have all the rate reductions we’ve seen in the last year now hit their low point and won’t drop any further and there is only one way they are going to go in the future and that’s up.
But again who knows if and when that will happen.
Or do you just take safe route and opt for a fixed rate and know you are paying a fixed amount for 48 months, rather than a fixed amount for 12 months. And if you end up paying a little or a whole lot more on a fixed rate, you’re still okay with that because you need that certainty because when you ran the what if scenario, it would make a big impact on your finances particularly if rates increased.
Okay, let’s talk about fixed rate mortgages for a moment.
They are the straightforward reliable product that everyone understands. They are particularly good for first time buyers and anyone who is on a budget and needs the stability of a set monthly repayment. I believe about 80% of all first time buyers are currently choosing fixed rates.
And the concept behind them is this, no matter what happens to base rates and no matter what happens with the ECB, your monthly repayment will remain the same for the duration of the fixed period chosen.
It’s very important for you not to fix for longer than you think you will be comfortable with as one of the main disadvantages of fixed rates is that if you wanted to either re-mortgage or move to another property before the fixed rate expires, you may have to pay a sizeable early redemption penalty for doing so. Which means that when choosing a fixed rate term make sure that you will be in your new house, to the best of your knowledge at the time of deciding, for at least the same period of the fixed rate so you can avoid those early redemption penalties.
What happens after your fixed rate expires?
Your lender will write to you about a month or two before your fixed rate period expires and they will outline what options are available to you. So, you will be given an option to choose a fixed rate for another year, two, three, four, five or perhaps even 10 and you can choose to move to your lenders variable rate.
Finally, let me talk to you about variable rates.
With this type of repayment method your monthly instalment can go up or down during the course of your loan. It can remain unchanged for a considerable period of time and at other times change from month to month.
In general variable rate mortgages should be lower than fixed rates because the customer will pay an increased rate for the certainty of having a fixed rate but this may not always be the case particularly when the expected level of market rates is to come down.
And variable rates may suit a certain type of customer. Those for example who feel that rates will come down may opt for a variable rate in anticipation of this and also those who can afford the increase in repayments should their interest rate increase.

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They may also prefer a variable rate as it does not tie them to one particular lender for any period of time and their mortgage can be redeemed in full at any time without penalty. Indeed you can make partial redemptions off your mortgage at any time provided you are in a variable rate whereas with a fixed rate you may be limited to the amount you can pay off against your mortgage without penalty.
The big disadvantage to a variable rate mortgage is you cannot predict with certainty the monthly cost of your mortgage which can cause problems to those on tight budgets especially in a period when rates do increase.
And it’s very important to bear in mind and know what the effect an increase would have on your monthly repayment should rates increase for example by .5% or 1%. Every loan offer letter now will show you what your monthly repayment would increase by should rates rise by 1%.
I’ll leave you with one more option that many borrowers aren’t aware of and that’s splitting your mortgage where part of your mortgage is on a fixed rate and part is on a variable rate. So, should rates increase at least part of your repayment is protected and if rates decreased then your variable portion will reduce.  Choosing to split your mortgage into part fixed and part variable means your hedging your bets and perhaps getting the best of both worlds.