Monday 25 June 2018

How to save a six-figure sum on your mortgage repayment

With a war between lenders in full swing, it's a good time to switch from a pricey home loan to a better deal on a lower rate, writes Louise McBride

'The amount you can save when switching depends on the size of your loan, the percentage of the value of your home which you are borrowing, and how expensive your current lender is''. (Stock picture)
'The amount you can save when switching depends on the size of your loan, the percentage of the value of your home which you are borrowing, and how expensive your current lender is''. (Stock picture)
Louise McBride

Louise McBride

Homeowners could save as much as €133,000 on their mortgage by switching to a cheaper lender, an analysis by mortgage brokers Dowling Financial and the Sunday Independent has found.

Furthermore, with a mortgage war in full swing and more interest rate cuts expected from lenders in the coming months, even more savings could soon be up for grabs by switching.

The amount you can save when switching depends on the size of your loan, the percentage of the value of your home which you are borrowing, and how expensive your current lender is.

€500,000 switch

Dowling Financial examined how much could be saved by a homeowner who took out a 30-year variable mortgage last year and who now has €500,000 left to repay over the next 29 years.

Bank of Ireland is the most expensive lender for a homeowner getting a variable mortgage to borrow more than 80pc of the value of their home. Bank of Ireland charges 4.5pc interest on such a loan.

Had you taken out a 30-year mortgage with Bank of Ireland last year and still have €500,000 left to repay on that loan over the next 29 years, the interest over the next 29 years will add up to €396,090 - assuming you're borrowing more than 80pc of the value of your home, according to Dowling Financial. This is almost €133,000 more interest than you would pay if you switched your remaining 29-year mortgage of €500,000 to AIB on November 1 - the date that AIB will cut the interest rates on its variable mortgages.

From November 1, AIB will charge 3.15pc interest on a variable mortgage where more than 80pc of the value of the home is being borrowed. Under that rate, the interest on a €500,000 variable mortgage over the next 29 years would add up to €263,282. That's much lower than the interest you would pay with Bank of Ireland - or with Permanent TSB, which charges 4.2pc interest on such a loan, making it the second most expensive lender in this case.

The interest on a €500,000 variable mortgage (where more than 80pc of the value of the home is borrowed) would add up to €365,611 with Permanent TSB over the next 29 years - so in this case, a homeowner would save €102,329 by switching from Permanent TSB to AIB.

€200,000 switch

Dowling Financial also examined how much could be saved by a homeowner who took out a 30-year variable mortgage last year - and who now has €200,000 left to repay on that mortgage over the next 24 years. Again, the biggest savings would be made by a homeowner who switches from Bank of Ireland or Permanent TSB to AIB. The homeowner would save €42,126 in interest by switching from Bank of Ireland to AIB, and €32,489 in interest by switching from Permanent TSB to AIB - assuming more than 80pc of the value of the home is being borrowed and the borrower switches to AIB on November 1 (when the bank's latest round of interest rate cuts kick in).

Cheapest mortgages

AIB will have the lowest variable mortgages on the market when it cuts its rate on November 1 - unless other lenders undercut it by then.

AIB already offers the lowest variable mortgages in the market - along with KBC Bank and Ulster Bank. All three lenders charge 3.5pc interest on a variable mortgage where 80pc of the value of a home is being borrowed. That's currently the lowest such rate in the market. There are no strings attached to AIB's 3.5pc rate -unlike KBC and Ulster Bank, where conditions must be met.

Fixed mortgages

Don't overlook the fixed rates offered by an existing or new lender - as switching to a fixed-rate mortgage from an expensive variable one could save you a lot of money. Some lenders have cheaper fixed mortgages than variable ones and some of the fixed mortgages available are amongst the cheapest mortgages around. Since the start of this month for example, KBC has been offering a 10-year fixed mortgage of 2.99pc to those borrowing between 60pc and 80pc of the value of their home.

Ulster Bank offers a four-year fixed rate of 2.6pc to customers borrowing €300,000 or more - as long as no more than 80pc of the value of the home is being borrowed. Bank of Ireland offers a two- and three-year fixed rate of 3pc for those borrowing up to 80pc of the value of their home.

Only consider fixing your mortgage, particularly if it's a seven or 10-year fixed rate, if you don't expect to move home. This may not be the case if you recently bought your first home. "If this is your second or third home, you're unlikely to move again so you could consider KBC's 10-year fixed rate," said Michael Dowling, managing director of Dowling Financial.

The main advantage of a fixed rate is that you know exactly how much your repayments will be for a set period of time. There is an expectation that interest rates will start to rise again in the coming years and homeowners on fixed mortgages would be shielded from such rises as their repayments would remain the same. However, should interest rates fall, those on fixed mortgages lose out on the benefit of rate cuts as only those with variable mortgages would get such cuts passed on (depending on the lender).

Switching steps

Should you have only taken out your mortgage about a year ago, it is not too early to consider switching. You must usually wait until you're at least a year into a mortgage before a lender will allow you to switch your mortgage to it.

"Some lenders will consider letting you switch your mortgage if you're six months into a mortgage," said Dowling.

"If you're switching six or 12 months after taking out a mortgage, make sure the costs of switching are covered by your new lender as it won't have been long since you paid for the valuation and legal fees on the original mortgage."

Some lenders offer to meet the cost - or pay a contribution - towards your legal fees. Some will also cover the cost of the property valuation.

Should you have a fixed mortgage, your lender could charge a redemption fee (a fee to cover the cost of you breaking your fixed rate contract) if you switch to another lender before your fixed mortgage term is up. Redemption fees can run into the thousands and so it may be wiser to wait until your fixed term expires before switching.

It can be cumbersome to switch your mortgage. "It takes on average between three and four months to switch so it's a very slow process," said Dowling. "When you switch to a bank, your new lender won't know you so you've to go through exactly the same process as you did when you applied for your original mortgage."

This means you must provide your new bank with all the documents it requires with a mortgage application - including salary certs, your P60, proof of savings, current account and loan statements for the last year, and so on.

Before switching, check the track record of the lender: choose a lender who has been fair to customers and who passes on interest rate cuts to existing (as well as new) customers.

You may not even have to switch to a new lender to get a cheaper mortgage - particularly if you're a few years into your mortgage. The proportion of the value of your home which you are borrowing could now be much lower than when you first took out your mortgage - and you may qualify for a lower interest rate as a result.

Your bank may offer you a lower rate even if you don't strictly qualify for it.

"If you want to switch, talk to your existing lender first," said Dowling. "A bank will not want to lose your business so it may move you to a cheaper rate."

Useful resources

ccpc.ie

This is the website of the Competition and Consumer Protection Commission. It has a very comprehensive and useful guide to switching mortgages, which explains whether or not you will be eligible to switch your mortgage, things you need to consider — and how to go about switching your mortgage. To bring up the guide, click the ‘Find out more’ button in the ‘Consumers’ section of the main home page, then ‘Mortgages’ in the ‘Financial Comparisons’ drop-down menu, then click the ‘Mortgage Information’ link — and finally click ‘Switching lenders or mortgages’.

aib.ie/our-products/mortgages/mortgage-interest-rates

This link, which is part of AIB’s website, provides the latest information on the bank’s mortgage interest rates.

ulsterbank.ie

Ulster Bank pays a €1,500 contribution towards legal fees — and offers free valuations. This offer is available to switchers, first-time buyers, home movers, and buy-to-let borrowers. You can get more information about this offer by clicking the ‘More about our mortgages’ link in the ‘Personal’ section of the website.

permanenttsb.ie

Permanent TSB recently launched a new special offer, where new customers (including first-time buyers and switchers) can get cashback equivalent to 2pc of the value of each monthly mortgage repayment they make (until the end of 2027). Under the offer, the bank will also give cashback of 2pc of the full amount of the mortgage drawn down (which is paid upfront within 20 working days of the mortgage drawdown). The offer is not available to buy-to-let investors. To find out more about the offer, and the conditions which must be met to take it up, click the ‘First-time buyer’ button in the home page’s ‘Mortgages’ section. Before being tempted by this financial incentive, compare the cost of other mortgages on the market — and see if you would save more money in the long run by opting for a lender who offers a lower interest rate rather than a special offer.

bankofireland.com

Bank of Ireland pays 2pc cashback when you switch a mortgage to it — and an additional 1pc cashback in five years’ time (as long as you still have your mortgage with the bank). So a customer switching a €250,000 mortgage to Bank of Ireland would get €5,000 back in cash upfront, and an additional €2,500 in five years’ time. To find out more about this offer, click ‘Cashback Plus with your mortgage’ on the home page. Bear in mind that these savings will be wiped out by the interest on your mortgage over time — particularly if you’re switching to a variable mortgage with Bank of Ireland, as the bank is the most expensive lender for variable mortgages. A lender who doesn’t offer such a cashback incentive, but who has a lower interest rate, will likely work out cheaper in the long run.

kbc.ie

This is the website of KBC Bank, which offers a competitive 10-year fixed rate mortgage and some of the lowest variable rates on the market.

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