Boom can help homeowners make huge savings on their mortgage
Some who bought in the recession could switch and save hundreds of thousands, writes Louise McBride
More than 100,000 homeowners could be paying tens of thousands more for their mortgage than they need to - because they haven't taken up the cheaper mortgages which the property boom has put within their reach. In some cases, homeowners are losing out on hundreds of thousands of euro in savings by failing to move to cheaper mortgages.
The uplift in property values means that many homeowners are now borrowing a smaller percentage of the value of their home than they did when they initially took out their mortgage. Such homeowners should now qualify for a much cheaper mortgage than the one they originally took out when buying their home.
This is because banks offer cheaper mortgages to people who are borrowing less than 80pc or 90pc of the value of their home. These mortgages are known as LTV (loan-to-value) mortgages. The LTV is the percentage of the property price borrowed and cheaper interest rates are usually available to those with low LTVs. The cheapest LTV mortgages are available to those borrowing up to half - or up to three-fifths - of the value of their home.
You're very likely to qualify for a cheaper mortgage if you bought a home between the second half of 2011 and early 2015 - which was the cheapest time to buy property in Ireland since 2006, according to the latest figures from the property website, daft.ie. The national average sale price was below the €200,000 mark during that time, sinking to a low of €164,248 in early 2013, according to daft.ie. The national average sale price has since risen to €253,925 - a price increase of more than 50pc.
Many homeowners who bought in the depths of the recession have seen the value of their properties increase by even more than this. For example, in late 2011, the average asking price for a property in Dublin city centre was €159,099, according to daft.ie. This has since risen to €330,683 - more than double the price. Daft has also found that the average asking price for a property in south Dublin city has risen from €217,353 in late 2011 to €407,404 - almost double the price.
These homeowners are in line for savings of tens, perhaps, hundreds of thousands by moving from an expensive mortgage to a cheaper one.
Homeowners who bought before the property boom started in the early Noughties should also be able to chop the cost of their mortgage by moving to an LTV mortgage - as long as they're not on a tracker mortgage. So too should those who took up an LTV mortgage which doesn't now accurately reflect the increased value of their home, and those on an expensive fixed-rate mortgage (as long as they are near the end of the fixed rate term).
The homeowners with most to save by moving to an LTV mortgage are those on standard variable rate (SVR) mortgages as these are typically the most expensive mortgages. More than 200,000 homeowners could be on SVRs, according to mortgage expert Michael Dowling, who is managing director of the Dublin mortgage brokers Dowling Financial.
Last summer, it emerged that more than 100,000 homeowners at Permanent TSB and Bank of Ireland were on SVRs after the figures were disclosed to the Oireachtas Finance Committee. KBC told the same committee that 36,674 of its customers were on SVRs at the time. When contacted by the Sunday Independent, none of the banks would divulge the actual number of their customers currently on SVR mortgages. However, a spokesman for KBC said: "35pc of existing residential mortgage customers are currently on a SVR". A spokesman for AIB said that variable mortgages account for 56pc of its mortgage book - but this figure includes SVRs and other variable mortgages. Ulster Bank said the information was "commercially sensitive".
Savings up for grabs
Permanent TSB has the most expensive SVR mortgage on the market with an interest rate of 4.5pc - the same rate charged by Bank of Ireland to those on variable mortgages who borrow more than 80pc of the value of their home.
You would save about €57,000 in interest by switching from Permanent TSB's SVR mortgage or Bank of Ireland's most expensive variable mortgage (4.5pc interest) to the cheapest LTV variable mortgage available from AIB, Haven or Finance Ireland (all offer a rate of 2.75pc) - if you had €200,000 left to repay on your mortgage over 25 years, according to figures compiled by Dowling Financial. In this example, the interest on the Permanent TSB or Bank of Ireland mortgage would add up to €133,488 over 25 years - compared to €76,786 with AIB, Haven or Finance Ireland, according to Dowling Financial.
The savings would be even greater if you have a large mortgage. For example, you would save almost €142,000 in interest by switching from the Permanent TSB or BoI mortgage to AIB's cheapest LTV variable mortgage - assuming you have €500,000 left to repay over the next 25 years, according to Dowling Financial. Homeowners borrowing up to half of the value of their home qualify for the cheapest LTV mortgages offered by AIB, Haven and Finance Ireland.
You don't have to own a property which has doubled in value to be able to get a cheaper mortgage. Should the uplift in the property market mean that you are now borrowing between 50pc and 80pc of the value of your home, you should qualify for a cheaper mortgage - if you originally borrowed 80pc or more of the value of your property.
For example, you would save about €50,000 by switching from Permanent TSB's SVR mortgage to an LTV variable mortgage with AIB - if you have €200,000 left to repay on your mortgage over the next 25 years and you are borrowing less than 80pc of the value of your home, according to Dowling Financial. AIB offers a variable interest rate of 2.95pc to those borrowing between 50pc and 80pc of the value of their home.
Out of the loop
Many homeowners who bought at the height of the boom are unlikely to qualify for the cheaper LTV mortgages being offered by the banks today - because the percentage of the value of their home which they are borrowing may still be over the 80pc mark. Today's national average sale price is still below what it stood at in 2006, 2007, 2008 and 2009, according to daft.ie - so anyone who bought during those years may not be in the running for a cheaper mortgage.
Homeowners still in negative equity will also be unable to take up a cheaper mortgage because they owe more than the value of their home.
There has been a sharp drop in the numbers of homeowners in negative equity, however. In late 2011, about 230,000 homes were in negative equity, according to the Central Bank. This had dropped to 57,000 by late 2017 and is likely to be lower today given the house price growth of 2018. Property expert David Duffy believes that there will be no homeowners in negative equity by the middle or end of next year. "This is due to a combination of rising house prices and households making their mortgage repayments, thereby reducing their debt," said Duffy, director of Ibec's Property Industry Ireland and a previous senior researcher with the ESRI.
Homeowners on tracker mortgages should hold onto their trackers as these are still among the cheapest mortgages around - and so, you're very unlikely to save money by switching from a tracker to an LTV mortgage.
Inertia costs money
You don't have to move lender to get a cheaper mortgage. All of the lenders offer LTV mortgages now, though your lender's LTV mortgage may not be as cheap as that offered by another bank.
"Talk to your lender and see what it's prepared to offer," said Dowling. "No bank wants to lose an existing customer. Anyone who has taken out a mortgage from 2008 onwards and who is either on a SVR or a fixed rate should save some money by moving to an LTV mortgage. Even a saving of €50 a month on your mortgage repayments is worth it. Customer inertia is the biggest weapon the banks have."
Ins & outs of cheaper LTV mortgages
HOW DO I GET A CHEAPER LTV MORTGAGE?
Tell your existing lender that you believe you qualify for a cheaper mortgage as a result of an uplift in the value of your home — and ask it what’s the best interest rate you qualify for. You may need to arrange a valuation to prove your case and this will typically cost about €150. Permanent TSB covers the cost of such a valuation — though most banks require you to pay for it yourself. However, a few banks, including Ulster Bank, make an assessment of the value of your property — based on other similar properties in your area. Should you be happy with that assessment, you don’t need to arrange a valuation. You don’t need to apply for a mortgage again to move to a cheaper mortgage with your existing lender. AIB, Haven and Finance Ireland offer the cheapest variable loan-to-value (LTV) mortgage (interest rate of 2.75pc for those borrowing up to half of the value of their home). You can get an LTV rate of 2.95pc from AIB or Haven if borrowing between 50pc and 80pc of the value of your home; or from Finance Ireland if borrowing between 50pc and 60pc. At 3.0pc, KBC offers the third-cheapest variable LTV mortgage — for those borrowing up to 60pc of the value of their home (as long as the borrower has a current account with the bank) while Ulster Bank is the fourth-cheapest, with an interest rate of 3.1pc for a loan-to-value ratio of up to 60pc (as long as borrower qualifies for its loyalty rate).
WHAT IF I’M IN MORTGAGE ARREARS?
You should still be able to move to a cheaper LTV mortgage with your existing lender if you’re in mortgage arrears. You’re unlikely to be able to take up another lender’s LTV offer though.
WHAT IF I’M ON A FIXED MORTGAGE?
You will usually be hit with a breakage fee if you move from a fixed mortgage to a cheaper one. These breakage fees can be huge and could eat up a big chunk of the savings you’ll make by moving to the cheaper mortgage. So it may be wiser to wait until your fixed term is up.
MUST I MOVE LENDER?
You may need to switch lender to maximise the savings you can make on an LTV mortgage — if your existing bank doesn’t offer you a good deal. When switching lender, you must apply for a new mortgage — which will involve the new bank inspecting your current account statements, savings and so on. You will usually struggle to switch to another lender if you are in mortgage arrears or negative equity. It will typically cost about €1,200 in legal and valuation costs to move to another lender. “All of the switching incentives offered by lenders cover that cost,” said Michael Dowling of Dowling Financial. AIB and Haven for example offer €2,000 to cover switching costs; KBC offers €3,000.
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