Thursday 22 March 2018

Home truths: Changing your mortgage can change your life


Most people who changed mortgage said it was a positive experience
Most people who changed mortgage said it was a positive experience
Charlie Weston

Charlie Weston

A mortgage is the largest financial undertaking for most of us. Monthly repayments can be crippling, if you are not fortunate enough to have a low-priced tracker rate.

Data from the Central Bank recently showed that 86pc of mortgages are on variable rates. As interest rates in Ireland are already higher than other Eurozone countries, mortgage holders here on variable and fixed rates are paying significantly more than their EU counterparts.

But there are ways to reduce the cost of your mortgage.

You have three options: switch lender, get a better rate related to the equity in your home, or break out of your fixed rate and get a cheaper one.

Switch lender

Moving your mortgage to a new lender is daunting and difficult, so much so that many think about it and then recoil from it.

But the rewards are large if you do summon up the courage and go to the effort of leaving your lender for a new one.

Changing from a rate of 4.5pc to a rate of 3.1pc could save you almost €200 a month on a €250,000 mortgage over 30 years. That is a saving of €2,400 a year.

Worth noting is that there have been almost a dozen interest-rate cuts, mainly on fixed rates, in the last few months.

And lenders are offering a range of cash incentives to new mortgage customers.

A Central Bank survey released earlier this year found that 44pc of people hadn't switched because they thought it would be too complex.

However, of those who did take the plunge, a huge percentage said that it was a positive experience.

It is important to remember that you generally have to have equity in your house to switch your mortgage.

Banks really don't want customers who are in negative equity or have a high loan to value (LTV).

So all the incentives are aimed at customers from other banks whose mortgages are below their house value - the more the better.

Also, the fear that you will move your mortgage may be enough to prompt your lender to offer you a lower mortgage rate.

Financial adviser Frank Conway says: "Sometimes just threatening to switch can do the trick." Mr Conway says you need to approach your bank with your homework done and a brass neck.

Bank of Ireland will hand back to switchers 2pc of the value of the mortgage after drawdown. In addition, if customers have a current account with the bank when they apply for a new mortgage, they can qualify for a further 1pc cashback after five years.

Permanent TSB and EBS are also offering 2pc cashback to all new mortgage customers, while Permanent TSB recently added a further incentive: it will pay 2pc of the monthly mortgage repayment into "a permitted PTSB account" at the start of each month.

KBC is offering €3,000 towards legal and other fees. There are also preferential rates for current account holders, together with a 50pc reduction in the cost of home insurance for the first year.

AIB will give you €2,000 within two months, while Ulster Bank will give you €1,500 towards your expenses. The incentives will cover your legal fees for the conveyancing work your solicitor has to do.

But mortgage broker Michael Dowling, of Dowling Financial, warns switchers not to get carried away with incentive offers.

When assessing the financial benefits of switching, the impact of introductory offers can be minor. Look instead at the rates and the payback timeline, he says.

And often it is better to opt for a bank with a lower rate than being sucked in to taking a cash-back offer. Over time, you will be better off with a bank with a lower rate than taking cash upfront.

Mr Dowling said that when reviewing switching options, look at reducing the term of the loan. This is particularly the case if you are selecting a fixed rate.

Take a €250,000 mortgage on an interest rate of 3.1pc. Paying that back over 30 years will cost €1,067 a month, and cost €134,000 in interest. Paying it back over 25 years will cost €1,199 a month, which is €132 more. But you will save €25,000 in interest.

Mr Dowling added: "Be mindful that by opening a current account with your new lender you will save as well.

"KBC will offer a 0.2pc discount for the life of the mortgage. Ulster Bank offers a saving of 0.25pc on average over the term of the mortgage."

He added that if your LTV is less than 60pc, KBC offers a 10-year fixed rate of 2.95pc which he said is worth consideration if you are looking for long-term value, particularly with breakage fee at near zero currently.

Get a better rate off your existing lender

For those with a variable rate mortgage, now is a good time to get a better deal, without having to move bank.

Some 125,000 mortgage holders could lower their variable payments by opting for LTV mortgage rates for existing customers at Bank of Ireland, KBC and Permanent TSB. LTV rates are based on the value of the home relative to what is owed on it.

Customers can get reductions of up to 0.8pc on the interest rate. They just have to apply to the bank to have a valuation done and seek a managed variable rate, or an LTV rate.

Break out of a fixed rate

Many mortgage holders who are locked into uncompetitive fixed rates can break free and get a better deal without having to pay a penalty.

In many cases, the penalty fees are lower than previously. This means there are still savings to be made. Fixed rates have been falling for months. But many people took out fixed rates when the interest charged on them was much higher.

Consumer advocate Brendan Burgess said most people were unaware that recent changes meant that most banks now charge no breakage free, or only a small one, when people break out of a fixed rate early.

He advised homeowners who have fixed at 4pc or 5pc to ring their lenders and see if there is a cost to opt for current fixed rates.

The EU's mortgage credit directive means banks have had to change how they calculate a breakage fee when a mortgage holder wants to exit a fixed rate early.

Until recently, banks calculated the fee based on the money they would lose until the end of the term from not getting the higher rate. It is also known as a pre-payment penalty.

But the EU directive means they can only charge a penalty based on what they would earn from keeping the mortgage funds on deposit, Mr Burgess said. As deposits are at or near zero, this means breakage penalties are very low.

The exception is AIB, which is charging a high breakage fee.

However, the group's EBS and Haven are using the same consumer-friendly breakage calculation as most other lenders.


Step 1

Carefully compare all providers or ask a mortgage broker to do this for you. He or she will include everything and will ensure the transfer is smooth.

Step 2

If you are doing it yourself, you need to be approved with the new mortgage provider. There will be financial evidence and applications to be completed. Explain you are a switcher - most banks now have a dedicated switching team - and check their website for details. Alert your old bank that you are considering moving; they may agree to meet the terms, saving you the bother.

Step 3

Get loan approved. There are costs involved with legal fees (conveyancing) and possibly surveys to the property. The bank may offer to cover some of these - ask.

Step 4

Ensure your life insurance (mortgage protection) and home insurance are re-assigned to the new mortgage provider. The insurers will provide forms for this and the original policies must move from one bank to the other.

Step 5

Change your direct debit to the new bank and agree a date for the mortgage payments to commence.

Total time: A day

Potential savings: €22,800 (on a 20-year mortgage of €250,000)

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