How to knock €138K off your mortgage
You could shave hundreds of thousands off your mortgage by switching lender, writes Louise McBride
Published 29/05/2016 | 02:30
Homeowners can save tens of thousands of euro more by switching mortgage today than they would have had they switched a year-and-a-half ago. A series of interest rate cuts by some of the country's main banks - along with the launch of cheaper mortgage products by others - has pushed up the amount that can be saved when switching.
In total, you can save as much as €138,000 by switching, according to figures compiled by Michael Dowling, managing director of the mortgage brokers, Dowling Financial.
The amount you can save depends on the size of your loan, the percentage of the value of your home for which you are borrowing, and how expensive your current lender is. The best savings are for switchers borrowing no more than half of the value of their home. However, even if borrowing a sizeable chunk of the value of your home, you could still save almost €100,000 by switching.
Dowling examined how much could be saved by a switcher who took out a 30-year standard variable mortgage with Permanent TSB (PTSB) or Bank of Ireland (BoI) last year - and who now has €500,000 left to repay on that mortgage over the next 29 years.
BoI and PTSB have the most expensive standard variable rate on the market. That rate currently stands at 4.5pc. Unlike most other lenders, both banks have consistently refused to cut their standard variable rate for existing customers.
The interest on your mortgage will add up to €396,088 over the next 29 years if you have a standard variable mortgage with BoI or Permo and have €500,000 left to repay, according to Dowling. You could slash that interest bill to €258,584 by switching to AIB or KBC - saving you almost €138,000.
That saving will only be made if you qualify for the cheapest variable rate offered by AIB or KBC and you will only do so if borrowing no more than half of the value of your home. The cheapest variable rate offered by either lender is 3.1pc but you must wait until July 1 to get that rate with AIB. (It is on that date that the lender's latest round of rate cuts kick in.) You must open a current account with KBC to secure its 3.1pc rate.
In January 2015, the most you could have expected to save if switching the same mortgage was €95,000, according to figures compiled by Dowling at the time. So there's as much as €43,000 more savings up for grabs for switchers today than there was in January 2015.
Can I save if switching and borrowing
more than half the value of my home?
You could save as much as €128,000 by switching mortgage if borrowing more than half of the value of your home - as long as your loan-to-value ratio (LVR - the percentage of the price of your home that you're borrowing) is less than 80pc. KBC and Ulster Bank are the cheapest lenders for those borrowing just less than 80pc of the value of their home. Both offer a variable interest rate of 3.2pc to such borrowers - though you must have a current account with the bank in question to get it.
Switching from a standard variable mortgage with BoI or PTSB to KBC or Ulster Bank would save you €128,000, according to Dowling - assuming you have a 29-year mortgage of €500,000 to repay and have an LVR of less than 80pc.
What if I'm borrowing more than 80pc of the value of my home?
You could still save a lot of money. AIB and KBC offer the cheapest variable mortgages to those borrowing more than 80pc of the value of their home. At 3.5pc (from July 1), AIB's rate is cheapest while KBC's best rate is 3.65pc.
Under those rates, you could shave €99,462 off your interest bill if switching to AIB, or €84,935 if switching to KBC - assuming you have a 29-year standard variable mortgage of €500,000 and are switching from BoI or PTSB.
Can I save without switching?
Most banks - including those who have refused to cut their standard variable rates - have launched cheaper mortgage products since early last year. For example, PTSB's managed variable rate mortgages (where the interest rate is tied to a particular LVR) are much cheaper than its standard variable rate mortgages.
Although PTSB doesn't pass on rate cuts to its customers on standard variable mortgages, those on managed variable rate mortgages get the benefit of rate cuts - whether they're existing or new customers. You could save as much as €80,000 by switching from PTSB's standard variable mortgage to its cheapest managed variable rate mortgage - assuming you have 29 years left to repay a €500,000 mortgage.
"The first thing anyone on an expensive standard variable mortgage should do is talk to their lender and see if they can get a better rate from it," said Dowling. "There's no guarantee that the new lender you want to switch to will give you the mortgage you currently have. Most lenders will negotiate your mortgage rate - on the basis of a current valuation of your home."
However, should your lender not offer you a better deal, it's time to switch.
Will the savings get even better?
With further interest rate cuts expected over the next year, even more savings should up for grabs when switching mortgage in the future. There is mounting political pressure on banks to chop expensive variable rates.
With more lenders eyeing up the Irish market, competition amongst the banks should also step up - and so too should their willingness to slash the cost of their mortgages.
Last February, Pepper became the first new mortgage lender to hit the Irish market in about 16 years. Another new lender, Frank Money, is expected to start offering mortgages here soon. "Even the mention of a new entrant coming in has switched the banks on and encouraged many of them to revise their rates," said Trevor Grant, chairman of the Association of Expert Mortgage Advisers (AEMA).
How can I make sure that I can switch?
Don't sign up to a fixed rate mortgage - no matter how cheap it seems. You will lose your freedom to switch mortgage cheaply if you do so.
A fixed rate locks you into a mortgage for a few years. Unless you see the fixed rate term through, you're typically hit with a penalty fee for breaking your contract. That fee could run into tens of thousands of euro - or more. "The banks all know that interest rates are coming down - and that one way to kill the switcher market is to get more people onto fixed rate mortgages," said Karl Deeter of Irish Mortgage Brokers. "Banks are playing a defensive game. They're not competing on variable rates - they're competing on fixed rates instead."
You may find it hard to switch if you have recently changed job and are on probation - though this won't always be the case. "If you have moved into a new job - but for more money and in the same line of work, and you have an excellent mortgage repayment record, the bank may take the view that your probation period isn't a problem," said Grant.
A poor credit history will make it harder for you to switch. You still may be able to do so however, depending on the extent of the arrears.
"Lenders typically want to see that you're dealt with a missed repayment quickly," said Deeter. "There's no guarantee that a bank will allow you to switch your mortgage to it if you missed one repayment, but they'll usually consider you. If you've missed more than one repayment though, you'll struggle to switch."
You usually won't be able to switch mortgage if you're in negative equity. However, even if you bought during the boom, you could be starting to emerge from negative equity now. Getting an up-to-date valuation of your home would be a good move.
Do your sums before you switch - and only move to a lender who will save you money over the lifetime of your mortgage. Choose a lender who passes on interest rate cuts to existing customers - rather than just new ones. Doing so ensures that you don't lose out on any rate cuts down the line.
It shouldn't take you any longer than six to eight weeks to switch mortgage, according to Grant. "Many banks are offering to contribute towards the cost of legal fees if you're switching - so the cost of switching is very low," said Grant.
If you can save tens - or hundreds - of thousands by switching mortgage, and it costs you little - if anything - to do so, what are you waiting for?
Sunday Indo Business