Each month, up to 160,000 Irish families have no pockets of their own – up to hundreds of euros – because they simply haven’t considered switching mortgages. Many don’t realize that rates are falling and lenders are eager and well equipped to lure you into their deals.
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Is it really worth all the effort?
Well, you assume there is a lot of hassle. But we’ll come back to that. For now, the simple answer is yes, if you, like many, can make significant savings. Just last week, the Economic and Social Research Institute think tank – which informs government policy – reported that many Irish families could make “big profits” by moving mortgages to one of their current lender’s competitors.
Days in advance, the Association of Irish Mortgage Advisors (AIMA) estimated that eight in ten homeowners with a standard floating rate are overpaying hundreds, if not thousands, of euros each year. That’s up to 160,000 families who pay too much because they haven’t looked into switching.
But don’t we all pay too much in Ireland? Isn’t that just a fact of life here?
Compared to our European neighbors you are right. We still have the second most expensive mortgage rate in the Eurozone after Greece. The overall average mortgage rate in Europe is 1.37 percent. Roughly speaking, that’s about half the average rate of 2.9 percent here (2.8 percent for fixed rates and 3.2 percent for variable rates).
According to the Banking and Payments Federation of Ireland (BPFI), which represents mortgage lenders, the average first-time buyer takes out a home loan of €225,000. Obviously that will be a little higher in Dublin, and a little less outside the capital, but let’s take that average as an example.
If you borrowed that amount over 30 years — at the average mortgage rate of 2.9 percent — you’d pay an extra $174 per month in Ireland compared to the average borrower in the eurozone. That’s over $2,000 over a year, which could be spent on health care, childcare, education, or paying off debt, just to name a few.
So it’s just a fact of life here?
You will not easily get such a good deal as our friends in Germany or France. But as more competition creeps into the Irish market, rates have fallen very slowly in recent years.
Banks left Ireland during the recession: Halifax and Danske Bank, for example, closed their residential operations. But with the recent arrival of non-bank lenders like Finance Ireland and more people who want to switch within the main lenders here – mainly AIB and Bank of Irelandand to a lesser extent Ulster Bank – they are all forced to offer better deals.
What kind of savings can I expect?
Suppose you are a couple who took out a 30-year mortgage of $300,000 two years ago at 3.5 percent. According to calculations by mortgage advisers at AIMA, you could save almost $140 each month by switching to a 2.5 percent loan with a five-year term. If you switched to a mortgage with a standard variable rate of 2.95 percent, you would have an extra $85 in your pocket every four weeks.
It’s true that when you switch mortgages, the process you go through is quite similar to when you first took out a mortgage, and that puts a lot of people off
Borrowers with a 3.9 percent mortgage of €350,000 over 25 years can save more than €230 and €160 respectively each month by making the same switch.
“A lot of people got the best deal available at the time they took out their mortgage and they understandably assume it’s still the best,” said AIMA president Trevor Grant. “However, the reality is that it is now probably obsolete. Others believe that if they remain loyal to their current bank, it will somehow be reciprocated – which is an absolute misconception.”
Are there rates as low as 2.5 percent out there?
And less. The lowest rate at the moment is KBC’s 2.25 percent. You need to have 40 percent equity on your home, so it may not be a runner for everyone. The same lender also has a fixed rate of 2.3 percent with less onerous terms, while Ulster Bank also offers a rate of 2.3 percent.
“If you pay an interest rate of more than 3.5 percent or 4 percent on your mortgage, you can really save money,” says”, Daragh Cassidy from website Bonkers.ie. “Your mortgage should be just like any other account. You have to switch or at least look at it every few years to make sure you get the best deal.”
Why are we so reluctant to switch our mortgage?
In general, switching rates between services in Ireland are starting to improve. Compared to other countries, we are getting better at changing utility providers such as gas and electricity. Recent research shows that about 30 percent of us have switched broadband and TV providers in the past three years. About a fifth changed gas supplier in 2018, compared to 14 percent who switched electricity supplier.
But mortgages — like credit cards and checking accounts — is one area where we need to get better at shopping.
“There are a few reasons,” Cassidy says. “There might be a bit of slowness, a fear that the process will be too difficult and maybe people don’t realize what they could actually save. Some people think there’s a lot of hassle involved.
“It’s true that when you switch mortgages, the process you go through is quite similar to when you first took out a mortgage, and that puts a lot of people off. But if you look at the numbers and what you could save – up to $200 or $300 a month – it’s a case of nothing risked, nothing won. There is a lot of money to be saved.”
However, switching is not accessible to everyone. For example, if you changed jobs since you got your mortgage and you don’t earn as much or you have negative equity or have missed repayments, that can be difficult.
The closer you are to the end of your fixed term, the lower the costs will be – in some cases this can be negligible
It also goes without saying that if you have a tracker rate of, say, the European Central Bank rate plus half a percentage point, you won’t get a better deal, so there’s no point in even looking.
But if you’re in the mid-to-high end of the mortgage rate range, it’s worth looking at your options at the very least. If no one wants to make you switch, that’s fine – it’s not the end of the world. “You’ll likely find out very quickly in the process if your move is accepted, before incurring legal fees,” Cassidy added.
If I have a fixed rate, can I not switch?
Technically, if you currently have a flat rate, you’re stuck with it, but you can get out by paying a breakage fee. The banks have a very specific formula for calculating that fee, and there is a – well-founded – perception that they are prohibitively high.
“But those have fallen in recent years because interest rates are much lower now,” Cassidy says. “Of course the banks are not shouting about this, but you might find that the costs are only a few hundred euros, and that will give you the savings in the medium term. If the costs are thousands of euros, it may be wise to wait until your fixed term expires.
“The closer you are to the end of your fixed term, the lower the cost will be — in some cases it can be negligible.” Your bank should let you know what those charges will be if you ask them.
How am I going to switch?
The first thing to do is log into your internet banking or call your bank and ask what mortgage interest you are currently paying, what the remaining term of the mortgage is and what the outstanding amount is. Armed with these three pieces of information, you can use a number of online mortgage calculators operated by lenders and comparison sites, including one by the Competition and Consumer Protection Commission at ccpc.ie.
If the savings look good, contact the lender that offers a deal that’s right for you and tell them you want to switch to them. Many of the lenders have varying teams. They send a switch package. You fill that in with information they want and take it from there.
You said you hired a lawyer again?
Legal fees are one of the things that most keep people from switching mortgage providers or rates. Inevitably, these are necessary and it is a cost to consider when assessing the wisdom of making a move.
Cashback offers play a role in the Irish market as long as people go in with their eyes open and know what they are signing up for
However, mortgage brokers at AIMA note that the costs should be lower than those involved in taking out your home loan. And they point out that all major lenders seem to offer some form of payment or cashback offer to help switchers cover the costs.
This can be a fixed amount or a percentage payment of the value of the loan, which can result in a windfall of up to several thousand euros.
But haven’t I read that I should be wary of these incentives?
You did. The ESRI only warned last week that borrowers could be tempted to make poor decisions under the lure of the cash offers. It conducted a study that found that many would-be switchers were “initially attracted” to high cashback offers with little or no understanding of the implications of the APR (annual rate).
On average, consumers opted for $2,200 cashback over a 0.4 percent better APR — a move that would leave them worse off. But the ESRI also found that where mortgage holders were better informed, they placed much more weight on interest rates.
“Cashback offers play a role in the Irish market, as long as people go in with their eyes open and know what they’re signing up for,” Cassidy says. “Deals that offer cash back tend to be higher than those mortgages that don’t offer cash back. Three of the best rates today – at Finance Ireland, KBC and Ulster Bank – have no cash back.
But if you switch to a lower rate and get cashback, that would more than offset the costs.”
Anything else to consider?
It may be worth looking into “green” mortgages, which are gaining in popularity. They offer discounted interest rates if your home has a high BER energy rating — usually A or B. AIB offers a five-year fixed rate of 2.5 percent on these mortgages.
Anyone who has done a major renovation to their home in recent years, improving their energy rating to A- and B-band, may want to consider making some money back with cheaper mortgage payments and improved fuel bills.
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