Thursday 19 July 2018

The mortgage sweeteners that can leave a bitter taste in your mouth

€26K - Potential saving over the life of an average mortgage - if you don't take a sweetener
€26K - Potential saving over the life of an average mortgage - if you don't take a sweetener
Louise McBride

Louise McBride

Mortgage "sweeteners" could be worth nothing to you two years into your loan - and ultimately can cost you tens of thousands of euro in mortgage interest.

So such sweeteners - essentially, financial incentives offered by lenders in a bid to encourage you to take out a mortgage with them - should be treated cautiously, as their value is usually negligible when compared to the overall cost of a mortgage.

A lender that offers a sweetener could cost you more money in the long run than a cheaper lender who doesn't offer such a perk.

The main sweeteners out there are from Bank of Ireland, KBC Bank, Permanent TSB and Ulster Bank.

l Bank of Ireland offers a cash-back offer, whereby you get 2pc of the value of your mortgage back in cash if you take out or move your mortgage to it.

l Permanent TSB pays €1,000 towards your legal fees if you're a first- or second-time buyer - or if you switch your mortgage to the lender.

l KBC Bank pays €2,000 towards your legal fees if you switch a home loan you have with another bank to the lender.

l Ulster Bank pays €1,500 towards your legal fees if you're a first-time buyer, trader-upper or are switching lender.

Bank of Ireland's cash-back offer is potentially the sweetener with the largest value. The lender doesn't have a monetary limit on the amount of cash you can get back - as long as it is no more than 2pc of the value of your mortgage. So the larger your mortgage, the larger the value of the sweetener.

However, you could recoup the benefit of a cash-back payment from Bank of Ireland in less than five years if you instead went with a cheaper lender, according to Michael Dowling, managing director of Abacus Finance.

With a variable rate of 4.5pc (for those borrowing more than 80pc of the value of their home), Bank of Ireland is one of the most expensive lenders.

AIB, which doesn't offer any major sweeteners and charges a variable rate of 4pc, is one of the cheapest lenders. So too is EBS - its variable rate is 3.95pc. (AIB and EBS are due to cut their variable rates this October). At 3.9pc, KBC offers the cheapest variable mortgage - but you must open a current account with the bank to get it.

Let's say you're getting a mortgage of €250,000 over 30 years and you're borrowing just over 80pc of the value of your home. Bank of Ireland's 2pc cash-back offer would be worth €5,000 in this case. Your monthly repayments under a Bank of Ireland variable mortgage will be €1,267 - bringing the cost of your mortgage over 30 years to €206,000, according to Dowling.

However, if you have a current account with KBC (and so qualify for the 3.9pc interest rate), the monthly repayments on a variable mortgage with KBC would come to €1,179 - and the cost of your mortgage over 30 years will be about €175,000.

So you'll save €31,000 in interest over the lifetime of your mortgage if you go with KBC instead of Bank of Ireland - assuming rates don't change. That €31,000 in savings dwarfs the €5,000 value of the cash-back offer - and leaves you €26,000 better off.

"In this case, you will save €88 per month in mortgage repayments with KBC," says Michael Dowling. "Therefore, after 56 months, you will have recouped the benefit of the upfront payment of €5,000 received from Bank of Ireland."

The contribution that some lenders pay towards legal fees could be recouped even quicker.

For example, the monthly repayments on the same mortgage would come to €1,222.54 with Permanent TSB. That will cost you €190,114 in interest over 30 years - €15,114 more than KBC charges. So you'll be €14,114 better off with KBC, even allowing for Permo's €1,000 sweetener. Furthermore, you will save €43.54 a month in mortgage repayments if you go with KBC instead of Permo. That means you'd recoup the benefit of the €1,000 contribution in less than two years.

Most lenders also offer some form of discount off home insurance for the first year of your mortgage. However, you'd be crazy to choose a lender on the strength of a home insurance discount, as it might be only worth €100 - but the mortgage interest charged by your lender is likely to cost hundreds of thousands over the lifetime of your mortgage.

"What good is a financial incentive if ultimately the mortgage being offered is relatively expensive or the incentive offered prevents you from availing of better terms in the future?" says Trevor Grant of Cedarhill Financial Thinking.

"When choosing a lender, consider their track record for dealing with customers - that is, do they have a recent history of dealing incorrectly, inappropriately or unfairly with customers? Also, what is their track record of dealing with customers in distress or difficulty?"

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