Business Switching Saturday

Sunday 20 January 2019

How to switch your mortgage...what to do and what to look out for

 

See what your lender is offering first before you decide to move
See what your lender is offering first before you decide to move
Sinead Ryan

Sinead Ryan

Even though 66pc of the €7.6bn in new mortgages drawn down in 2018 were bought on fixed-rate terms - a huge increase - it still leaves Irish borrowers far behind their EU counterparts.

More than eight in 10 mortgages in other countries are fixed, often for much longer terms than we offer, with security of outgoings the main reason for that choice.

Although fixing gives peace of mind, borrowers should be wary of the consequences. There are often penalties if you decide to switch or pay off your loan early, although for now, many banks are choosing not to impose these; likewise, you may not be allowed to overpay your mortgage by way of additional monthly payments, or off-set a lump sum, which is a good way to utilise spare income in a high-debt situation.

Switching to a one, three or five-year fixed rate, however, can often offer better value over standard variable rates, but beware of offers which force you to switch your current account to avail of the best discounts, or attractive cash-back offers which may not carry a cheaper rate.

The programme of quantitative easing by the European Central Bank (ECB) has now ended, and the trillions of free euro will no longer be parachuting into banks. This invariably means interest rates will rise, but ECB President Mario Draghi will need to be brave to do this any time soon, especially with Brexit on the horizon.

That said, nervous borrowers may like the notion of tying down their monthly repayments, so looking around is a prudent approach. However, the easiest thing to do is to see what your lender is offering first.

Switching a mortgage from one bank to another is a laborious and expensive process. Switching internally is a bit of form filling, so it makes sense to start there. Needless to say, if you're one of the lucky ones on a tracker mortgage, don't even dream about it.

For those on variable rates, or coming off an existing fixed rate, the power is in your equity. This is the value of your home, over and above the mortgage on it.

Any less than 80pc and you're in the ball-park for value. Under 60pc and banks will give you an even better rate.

For the full loan-to-value limit (90pc) or for a first-time buyer, one-year fixed rate competition varies from KBC (2.5pc) to Permanent TSB (3.3pc) and the others in between (based on borrowing €405,000 over 30 years). Rising to a three-year lock-in, Ulster Bank's 2.9pc is excellently priced, while KBC's 2.8pc for five years also represents good longer-term value.

Read more: Getting a home loan is the easy bit...finding a house to buy is the challenge

Once you have a little equity built up, switchers will find an attractive market. At 70pc loan-to-value, KBC offers 2.5pc (one year), 2.6pc (three year) and 2.65pc (five year), and is currently the market leader at this level. Ulster Bank is also one to consider.

Two banks offer 10-year rates, which is a small market, and to which caveats should apply. A decade is a long time and you have no idea what changes could happen to you, your relationship or your house, in the meantime.

However, for the ultimate long-term security, Bank of Ireland has a rate of 3.5pc, while KBC offers 3.75pc (both will depend on loan-to-value).

This year will see some new lenders coming into the market, and they are not unwelcome.

At present, there are really only five: AIB owns EBS and Haven, despite branding them separately; Bank of Ireland and Permanent TSB are the only other 'Irish' lenders; while Ulster Bank and Belgian KBC make up the rest of the pack.

Aussie bank Pepper took over the servicing of Danske and Bank of Scotland loans and was offering mortgages to switchers but their new business book has been purchased by Finance Ireland, which will be setting up shop soon.

An Post is getting into the business once it can find a lending partner, while Credit Unions are being given a licence to sell mortgages also (these will be somewhat limited in scope).

This year may also see legislation in place to cap the interest rates banks can charge customers.

This is a thorny issue, since most of AIB, all of PTSB and a bit of Bank of Ireland are still State-owned, and in order to make them attractive for sale, capping loan-income is really not the way to go.

However, populist policies rarely bear any relation to logic, so Finance Minister Paschal Donohoe is coming under pressure to place a limit on rates.

Banks have form in over-charging. While average rates in the EU for mortgages are just 1.77pc, in Ireland it's 3.14pc (3.03 for fixed). Watch this space.

How to switch... Mortgages

STEP 1 Find out your loan-to-value (LTV) by getting a house valuation, and confirm balance on your mortgage with the bank. Divide one into the other.

STEP 2 Ask your own bank what fixed rates and terms apply for your LTV.

STEP 3 Complete the paperwork (it is technically a new loan), and confirm new monthly payment.

STEP 4 Calculate the saving over the term.

Potential savings: €23,179 (€250,000 loan, 60pc LTV)

Total time: 5 days

Irish Independent

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