BoI urges mortgage overpayments
Encouraging overpayment: Bank of Ireland (Photo: AFP/Getty Images)
Wednesday May 27 2009
BANK of Ireland has written to its mortgage customers encouraging them to use the opportunity offered by seven cuts in European interest rates to overpay their home loans.
People on tracker or variable-rate mortgages have seen repayments fall by as much as €500 a month since the European Central Bank started cutting rates last October.
Instead of benefiting from the lower monthly repayments, the bank has told its customers to consider maintaining their repayments at the level they were before the ECB rate cuts.
Overpaying the mortgage would have the effect of shortening the term of the home loan and reducing the interest that has to be paid.
However, some personal finance experts think this is not a good idea when borrower rates are so low.
They feel it would be better to put any spare money into a high-interest savings account to build up a contingency fund.
Provided this money is not needed, because of a job loss or some other reason, then the money can be used to repay the mortgage later.
Another alternative is to overpay personal loans or credit card debt where interest rates are so high they are a multiple of mortgage rates, and have actually risen rather than fallen in the past seven months.
But Bank of Ireland director of consumer banking Brendan Nevin said yesterday that mortgage customers who can afford to overpay their mortgage should consider this option.
"It is definitely in the mortgage customer's interest to pay down debt rather than to save," he said.
Mr Nevin said the risk was that people would spend the money if it was left in a savings account rather than using it to make a lump-sum payment on their mortgage.
Thousands
In a leaflet sent to home-loan customers Bank of Ireland points out that "by not reducing your monthly mortgage repayments you could save thousands in the long term".
"By paying off capital instead of interest, you can free up equity for trading up or releasing money in the future."
Mr Nevin insisted there was no benefit to the bank in giving this advice other than developing trust between bank and customer. The bank was not trying to shrink its loan book and was instead actively encouraging first-time buyers to take out mortgages.
Mr Nevin said a customer with a €250,000 mortgage over 30 years at a rate of 2.4pc would now be paying €974 a month on their mortgage.
But if this customer was to overpay by €200 a month for the entire life of the mortgage they would end up with monthly repayments of €1,174, but would save interest of €24,744 and shorten the mortgage by seven years.
- Charlie Weston Personal Finance Editor
