Changing Mortgage is a big deal - but so is the payback
Switching mortgages is daunting, but the potential savings are huge
Switching mortgages is a big deal. There's no getting around that. It's going to take time, and cost money. However, if you're going to save on interest over the next 20 years, it could be well worth it.
Finally, interest rates are beginning to fall and wasn't it a long time coming? With European Central Bank (ECB) rates close to zero, the amount it costs banks to actually borrow themselves, before passing it on to their own customers, leaves them with a margin of around 300 basis points, according to Karl Deeter of Irish Mortgage Brokers. "That's a good profit, but banks get away with high rates due to customer inertia. When it comes to financial institutions, people will complain but rarely leave, so why wouldn't they?"
Frank Conway of Irish Financial Review agrees. "Most Irish people now know that it's a good thing to switch their utility providers, or cable television services or health insurance around regularly in order to get a better deal. They're getting much better at seeing that, but when it comes to banks, especially mortgages, it's been slower. But it is seeping through and see what has happened? Banks responded by dropping rates and incentivising customers to switch accounts and loans."
When it comes to moving your mortgage there are a variety of scenarios where it makes financial sense. The first rule of thumb, in every case however, is that you must have equity in your house. "Banks really don't want customers who are in negative equity or at a high loan to value rate", says Conway. So all the incentives are aimed at customers from other banks whose mortgages are below their house value, the more the better.
"Sometimes just threatening to switch can do the trick", says Conway. "I recently had a client who saw a better deal elsewhere, informed their bank they were considering moving, and lo and behold they were offered the same rate, even though it wasn't one advertised anywhere. He was in good equity with two mortgages he agreed to bundle. He saved a fortune without switching at all."
Conway says you need to approach your bank with "your homework done and a brass neck" but shows it can be worth it. "Changing from a rate of say, 4.7pc p.a. down to a very feasible 3.99pc on a €250,000 mortgage saves €95 a month. Over the full 20 years, that's €22,826. To put it into perspective, one would need approximately €100,000 earning a return of 2pc (before DIRT) to earn the after-DIRT equivalent in return as could be achieved from switching".
Deeter says switching is one "of the active pools of lending" in banks currently. "They're all pulling from each other."
The sums speak for themselves. "Look at the KBC example. Average rates are hovering around 4.3pc at present for standard variable loans (SVR). KBC is aggressively going after switchers at 3.85pc and an additional 0.2pc if you give them your current account also. That's 70 basis points, which is the equivalent of €700 a year for every €100,000 borrowed. It's a huge saving, even building in the legal fees (around €800 + VAT) and some valuation and search fees."
He sees only good news ahead on interest rates. "The Euro yield curve is the determinator on future rates across Europe. For over five years, it's been negative. Long-term interest rates are low and dropping."
He says to expect more deals. Banks really need switcher business. They're currently paying to keep their own money on deposit with negative rates from the ECB. They can only make a profit by lending or charging fees. They're still nervous of a lot of new business, but switcher customers are pre-selected - by someone else. All the hard work has been taken out of the loop for them, and hence, the risk is lower.
Along with moving from one bank to another, moving to a fixed rate loan, even within your existing bank, can be a great idea. "AIB offers say 4.25pc on their SVR but change that to a three-year fixed and suddenly you're only paying 3.8pc," says Deeter.
Fixing carries its own risks, primarily that you are locked in for a period of time. But with interest rates stable, the comfort of the known payout can overcome that, especially if you only fix for one or three years.
Switching also brings other benefits. "When you switch mortgage, lots of things come under the radar, primarily life insurance or mortgage protection which also needs to be switched," says Deeter. "Rates there have been falling consistently as people live longer, healthier lives. Those who were (wrongly) sold a whole of life policy or even a longer-term policy, which they don't need, find when they switch their mortgage, they can effect a new policy for far less outlay, even though they're older now."
Mortgage incentives for switchers
Bank of Ireland
1pc cash back, unlimited, until December 2015.
Legal fees paid to maximum €1,000.
Discount on variable mortgage rate if current account also switched.
Legal fees to maximum €1,000 paid if current account switched to service mortgage also.
The dos and don'ts of switching mortgage providers
* If you have a tracker mortgage, stop reading. There is no incentive out there attractive enough to make that call. You'd be switching to a fixed or standard variable rate (SVR) - a definite no-no. Sit smugly and reflect on your good fortune.
* If you have a fixed rate coming to the end of its term, or are on a SVR, this is a great time to consider moving it, as interest rates have never been lower. If you have equity in your house, you're even better placed. Banks welcome those with loan-to-value (LTV) under 80pc with open arms. So, get your house valued (use the property price register or a local estate agent). If your mortgage is under 80pc of that amount, start looking around. If it's closer to 50pc you're onto a winner.
* There is no requirement to have your regular accounts in the bank you have your mortgage with but some banks really want them both. KBC's deal offering 0.2pc off SVR switchers depends on them getting your current account too. Move both and you'll get 50pc off (their) home insurance and legal fees to €1,000. That's hungry. Shop around for good rates by using comparison sites like www.bonkers.ie or consumerhelp.ie.
* Consider switching to a fixed rate. Traditionally, interest rates are higher, but not now. AIB, for instance, offers 4.05pc on a SVR up to 80pc LTV. Its three-year fixed rate for the same business however, is just 3.8pc. PTSB has 4pc on their SVR but a one-year fixed is 3.49pc. The message is that interest rates are stable, low and going to stay that way - it's a buyers' market.
* Use a broker. These guys know the market inside out and the small spend upfront (perhaps €500) is well worth it. They do the leg work and all the negotiations.
How to switch your mortgage
Carefully compare all providers or ask a mortgage broker to do this for you. He or she will generally charge up to €500 for the process, but it will include everything and will ensure the transfer is smooth.
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.
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!
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.
Change your direct debit to the new bank and agree a date for the mortgage payments to commence.
Comparing alternatives online or via broker 60 mins
Completing and collating loan application and evidence 180 mins
Order credit check online (www.icb.ie) 10 mins
Consulting with solicitor 60 mins
Transferring life cover 30 mins
Changing direct debit 20 mins
Signing contracts/collecting documentation 120 mins
Potential saving: €22,800 (on a 20-year mortgage of €250,000)
Total time: 480 mins