Wednesday 26 April 2017

Is it time to cut your ties with the bank?

You can cut tens of thousands off your mortgage if you're in the right credit union, writes Louise McBride

You can cut tens of thousands off your mortgage if you’re in the right credit union
You can cut tens of thousands off your mortgage if you’re in the right credit union
Louise McBride

Louise McBride

More of us may be able to cut our ties with our banks as credit unions and An Post step up their efforts to take them on.

Credit unions are planning to roll out more mortgages over the next year or two - and they are also expecting to offer debit cards to their members soon.

An Post, which is planning to launch something similar to a current account shortly, is also "actively working" on a debit card.

These moves will come as a relief to those who have become increasingly frustrated with the banks - and who would grab the first opportunity to manage their money elsewhere.

It has become more expensive to deal with the banks over the last few years - because of the incessant hikes in bank charges.

At the same time, many banks have pulled back on the products and services they're offering to the public - with Bank of Ireland's recent restrictions on over-the-counter cash withdrawals and lodgements one such example.

But can credit unions and An Post really offer a feasible alternative to your bank - and could either save you money in the long run?

Mortgages

About 40 credit unions offer some sort of home loan, according to the credit union lobby group, the Irish League of Credit Unions (ILCU). This is only a fraction of the credit unions around the country.

However, should your local credit union offer a mortgage, it could work out cheaper to head there than to your bank.

Earlier this month, St Raphael's Garda Credit Union became the latest credit union to enter the mortgage market. Many first-time buyers who are members of St Raphael's will find it cheaper to get their mortgage from the credit union than from Bank of Ireland, Permanent TSB, Ulster Bank and the new Australian lender, Pepper.

A first-time buyer borrowing €198,000 to buy a home worth €220,000, for example, would save almost €25,000 in interest over 25 years by borrowing that money from St Raphael's instead of Bank of Ireland.

St Raphael's charges a variable interest rate of 3.75pc on such a mortgage, while Bank of Ireland charges 4.5pc. Ulster Bank charges 4.3pc interest, Permanent TSB 4.2pc and Pepper 4pc. AIB, one of the cheapest lenders on the market, charges 3.75pc interest - the same as St Raphael's.

So in this case, St Raphael's isn't just undercutting three of the biggest banks in the country, it is also competing directly with some of the cheapest lenders.

St Raphael's doesn't always work out cheaper for mortgages than some of the country's main banks.

Once you're borrowing 80pc of the value of your home or less, you have a better chance of getting a cheaper variable mortgage from a bank than from St Raphael's.

This is because St Raphael's only offers one mortgage interest rate - whereas most of the banks offer tiered interest rates, where house-buyers can get cheaper mortgages if they're borrowing 80pc of the value of their home - or less.

Bank of Ireland is the only bank which works out more expensive than St Raphael's for a trader-upper borrowing 80pc of the value of a €300,000 home, for example.

It is possible that more credit unions will roll out mortgages over the next year or two, according to a spokeswoman for the Irish League of Credit Unions. The larger your local credit union, the greater the chance of it offering mortgages.

"Each credit union as a separate legal entity may decide themselves if they wish to offer a home loan product," said a spokeswoman for the ILCU. "It would tend to be larger credit unions (who will be in a position to offer mortgages)."

The ILCU is currently examining how more credit unions could enter the mortgage market in a "meaningful" way.

Two options are being discussed. The first is where home loans are offered directly by individual credit unions - with these credit unions possibly assisted by a central processing and support structure.

The second option is where home loans would be available through a central structure - with funds provided by individual credit unions. Both options would require changes to regulation.

There is already a huge variety in the interest rates charged by the various credit unions on personal loans - with some credit unions much more expensive than others.

This trend is likely to be mirrored in credit union mortgages, so even if your local credit union starts to offer mortgages, you could pay a lot more to take out a home loan there than at your bank.

"It will be down to the individual credit union to decide (the interest charged on its mortgages) as each credit union sets its own lending rates," said the ILCU spokeswoman.

Current accounts

Although credit unions don't offer current accounts, you may already be able to get your salary paid into a credit union account.

In November 2013, credit unions got a licence to provide electronic payments services.

The service allows credit union members to have their wages, salaries or any payments from a bank, employer or social welfare office paid directly into their credit union by electronic transfer.

You can also set up direct debits with some credit unions to pay bills. Over 90 credit unions currently allow you to have your salary paid into a credit union account - and to set up direct debits with them to pay bills, says the ILCU. More credit unions are expected to follow suit.

CUSOP, a not-for-profit company which provides an electronic payments service for credit unions, is talking to credit unions and the credit union regulator about the possibility of offering debit cards to members.

An Post is also expected to launch a debit card soon, which customers will be able to use in post offices, online, at ATMs, in shops and for direct debit payments. In addition, An Post is developing a transaction account, which will be similar to a current account. Unlike the current accounts offered by banks, this account will not include an overdraft facility.

Until the transaction account becomes available, you can only open deposit accounts with An Post. You cannot get your salary paid into an An Post deposit account.

However, you can pay many bills in cash at an An Post branch or through Postpoint (a subsidiary of An Post).

An Post also has online bill-paying services known as mybills.ie and billpay.ie.

It is clear that there is still a lot of fiddling around to be done with mortgages, current accounts and debit cards before An Post and credit unions can become real alternatives to the banks.

They certainly seem to be heading in that direction - but let's hope the wait is not too long and that their prices are right.

Sunday Indo Business

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