Thursday 14 November 2019

Studying costs pays off in end

Charlie Weston

Charlie Weston

Shopping around for the best possible rate given your own circumstances really is vital

WITH the news of rising prices, it is easy to forget that price and cost are two different things.

Price is what you pay for a property, but the costs are the sums of all the inputs that will be going into it.

The cost can be mortgage finance, property tax, insurance, and maintenance, according to financial adviser with Irish Mortgage Brokers Karl Deeter.

These costs make a big difference, he says.

If you took two identical properties with a loan of €200,000 and one person had borrowed at a mortgage rate of 4pc and the other at 6pc, the difference over the life of a 25-year loan would be €70,000 in payments. This works out at about €2,800 a year.

"This is why shopping around for the best possible rate given your own circumstances really is vital. And the same goes for insurances.

"If a person walks into their own bank they'll be given a single serving choice of whatever rates they have," Mr Deeter says.

The likes of ICS are not obliged to let the prospective borrower know they have the highest variable rate on the market, or that their parent company Bank of Ireland will charge you 0.3pc less than they do for the same loan despite being in the same group, Mr Deeter points out.

The average price of a property in the capital is currently €225,000, which is over six times the average industrial wage.

Despite this, the European Commission still thinks property prices are 13pc undervalued, although that is a national figure.

Best mortgage rates

When it comes to rates the best on offer at present for a standard variable at an loan to value of 90pc (because that is still the most popular first-time buyer choice along with a 30-year term) the winners are Permanent TSB and EBS at 4.45pc, Mr Deeter says.

KBC Bank and Haven/AIB come in a close second at 4.47pc and 4.49pc respectively.

"The difference between 4.45pc and 4.49pc per month on a €200,000 loan is only a fiver, so the competition for 'best rate' is a dull contest in terms of a bottom-line difference," the mortgage broker says.

What nobody can know is what the bank will decide to do with variables in the future. This is especially so as they are not coupled to the European Central Bank key lending rate, and can rise and fall at the bank's sole discretion.

Where a person can put down a 20pc or more deposit it gets more interesting, according to Mr Deeter.

This is because banks prefer loans where the person puts more into the deal – it gives them less risk and more margin for error if the loan goes into arrears and they have to repossess.

At 80pc loan to value (LTV), the best deal is KBC Bank at 3.99pc, with ICS in last place at 4.7pc.

The difference on the same loan amount in this case is €85 per month. Choosing the wrong lender in that instance would cost you in excess of €30,000 over the life of the loan – that's the difference of a brand new car, he points out.

Fixed rates

The other area with variances is in fixed rates.

The best one-year fixed rate is from KBC Bank at 4pc. Permanent TSB does not do a one-year rate , but the worst in class is ICS at 4.69pc, Mr Deeter says. "You'll notice ICS are bottom of the table almost across the board."

When it comes to two and three-year fixed rates, KBC Bank has the lowest.

In 2012 AIB had about 66pc of the broker market and that is down by about a third. This is largely due to KBC Bank and Permanent TSB coming back into lending and doing so with attractive product suites.

Fixed or variable

The question of whether to fix or not is down to the individual.

Fixing a mortgage is like taking out insurance against rising rates, Mr Deeter says.

"While there are no indications of the ECB increasing interest rates any time soon, there is nothing to stop banks from doing this, as they have multiple times in the past."

Whether that trend will continue is uncertain. "We don't believe there are any surprise rate hikes coming and recently the trend in interest rates is down rather than up," Mr Deeter adds.

To put the cost of a fixed rate in perspective, imagine you took out a three-year fixed at 5pc (about where they are at present) on a €200,000 loan.

That will cost €1,073 per month on a 30-year term. The best variable would cost €1,007, which is €66 less per month.

If rates didn't change, the higher cost of the fixed rate would be €2,376 for the duration of the fixed period.

"Is that worth it? That's really an individual choice about how much you are willing to pay for certainty, even if rates rose in year two you might not be any worse off on a variable as you would have paid less in the previous period," he says.

What we hope you are taking from this is that for all the talk of property prices that costs matter too.

In getting your costs right, you need to research the market, be it on your own or via a professional adviser, Mr Deeter says.

Irish Independent Supplement

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