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Clear your mortgage by making smart use of interest rate cut

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OH HAPPY DAY: Wouldn’t we all love to be mortgage free?

OH HAPPY DAY: Wouldn’t we all love to be mortgage free?

Fotowerk - Fotolia

OH HAPPY DAY: Wouldn’t we all love to be mortgage free?

In three weeks' time 146,000 homeowners will see their mortgage repayments drop when AIB, EBS and Haven cut the interest rate on their variable mortgages. With other banks expected to follow suit, many more homeowners could see some money shaved off their mortgage bills in coming months.

So which could be the next bank to cut its variable rates?

It's anyone's guess, but Michael Dowling, managing director of mortgage brokers Abacus Finance, believes Bank of Ireland will be the first to follow in AIB's footsteps.

"AIB and Bank of Ireland have over 50pc of the home loan market and Bank of Ireland will want to maintain its market share," said Mr Dowling.

Mr Dowling believes that like AIB, Bank of Ireland will cut its variable rates by 0.25pc - and its fixed rates by more.

"AIB always offers the same rates for new and existing customers," said Mr Dowling. "Bank of Ireland do not. It will be interesting to see if Bank of Ireland will cut interest rates for new and existing customers."

At more than 4pc, Ireland has some of the most expensive variable-rate mortgages in Europe - so the move by AIB, EBS and Haven (EBS's broker channel) is long overdue. Those who can afford it should avoid the temptation to put any money saved from interest rate cuts back into their pocket - and instead use it to overpay their expensive variable mortgage. You could shave years off your mortgage by doing so.

A homeowner with a 30-year variable-rate mortgage of €300,000 with AIB would repay his loan a year-and-a-half earlier were he to overpay his mortgage by €40 a month - the amount this December's interest rate cut will save him.

Of course, you don't have to wait for your lender to cut its interest rates to overpay your mortgage.

A homeowner with a 30-year variable mortgage of €300,000 with Bank of Ireland would save €14,973 in interest and reduce her mortgage term by one year and seven months if she overpaid her mortgage by €40 a month.

A homeowner with a 25-year standard variable-rate mortgage of €200,000 with KBC Bank would repay his mortgage three years and two months earlier if he overpaid his mortgage by €100 a month from the third year into his mortgage. This would save him almost €18,443 in interest.

As well as overpaying your mortgage each month, you could pay a lump sum off your mortgage. Let's say you have just taken out a 30-year variable-rate mortgage of €300,000 with Bank of Ireland. The interest rate on your mortgage is 4.5pc. Were you to pay a lump sum of €15,000 off that mortgage, you would knock three years off your mortgage and save yourself about €39,000 in interest. Were you to pay a lump sum of €50,000 off your mortgage, you would knock eight years and eight months off your mortgage and save yourself almost €108,000 in interest.

Those with fixed-rate mortgages should tread carefully before overpaying their mortgage each month or paying a lump sum off their loan, as they could be hit with a penalty for doing so.

"All borrowers can overpay their mortgage, but an overpayment when on a fixed rate may incur a funding fee," said a spokeswoman for Bank of Ireland.

You may be able to avoid a penalty by limiting the size of your lump sum or overpayments.

With KBC Bank, for example, you can overpay up to 10pc of the outstanding balance on a fixed-rate mortgage through a lump-sum payment or monthly over-repayments - without incurring a penalty.

Permanent TSB doesn't allow you to pay a lump sum off a fixed-rate mortgage. However, you can overpay your mortgage each month.

The cheaper your mortgage, the better your chance of clearing it early - so if you are applying for one, do what you can to secure the lowest interest rate. Use any stockpile of savings you have to bring down the cost of your mortgage.

The best variable interest rates out there are for those who are borrowing half of the value of their home.

At 3.85pc interest, AIB and KBC offer the best variable rate for those with a 50pc deposit off the price of their home. (The 3.85pc rate for AIB kicks in on December 1).

The other banks are much more expensive.

The greater the percentage of the house price you are borrowing, the less chance you have of snapping up a cheap mortgage. Borrow more than 80pc of the value of your home and the best variable rate you'll get is 4.25pc from AIB (from December 1).

As some banks have started to compete with each other on fixed rates, you can get good value by opting for a fixed-rate mortgage today.

"A three-year fixed rate of 3.8pc from AIB must be considered by all borrowers," said Mr Dowling.

"Equally, AIB's five-year fixed rate of 3.9pc must be considered by all borrowers who believe they will not be moving from their home within five years."

EBS also offers a three-year fixed rate of 3.8pc and a five-year fixed rate of 3.9pc.

"Historically, any five-year fixed rate below 4pc is good value," said Mr Dowling. "Furthermore, the fixed rates from AIB are not linked to the percentage of the price of the home that you're borrowing."

Ulster Bank offers a three-year fixed rate of 3.99pc if you're borrowing less than 80pc of the value of your home.

Although you should do your best to secure the lowest interest rate on your mortgage, you should also consider a lender's track record when it comes to price competitiveness for their existing customers compared to new ones, said Trevor Grant, chairman of the Association of Expert Mortgage Advisers. "You should also consider how the lender treated customers who were in distress in the past number of years," said Mr Grant. "Nobody thinks they will have a problem with their mortgage payments, but you never know."

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