Changing lender can reduce mortgage payments

Some providers waive legal fees and offer lower rates to encourage switching, writes Laura Slattery

A mortgage may be a necessary evil for almost anyone interested in stepping onto the property escalator - a ridiculous and intimidating amount of debt to have to commit to in the name of home ownership.

But not all mortgages are quite as bad as each other - and the good news for consumers is that it is becoming easier and cheaper to make a switch.

This week, EBS Building Society became the second lender to offer to pay the legal fees of any borrower who switches their mortgage to its books. EBS follows Ulster Bank in making this offer, which saves switchers typical legal fees of €999.

The main conditions at both lenders is that borrowers must use a solicitor from the lender's panel and that they must not move on again within five years - if they do, they will have to reimburse the legal fees to the lender.

There are many reasons to switch mortgages to a new lender, but the main motivation should be to save money by switching from a higher interest rate to a lower one.

As long as borrowers are not locked in to a fixed-rate mortgage, they can switch to a cheaper lender without penalty, with legal fees the only potential upfront cost.

It might not sound like there's much of a difference between an interest rate of, say, 3.1 per cent and 3.6 per cent, but depending on the size and term of the mortgage it can amount to over a thousand euro a year.

The amount of interest being charged on mortgages has fallen in recent years, partly because the European Central Bank (ECB) base interest rate has flatlined at 2 per cent since June 2003.

Lenders have also introduced a new breed of variable rate mortgages known as tracker mortgages.

These mortgages are formally linked to the ECB rate, promising to move up and down at a set margin above this rate. More importantly, however, the margins are lower than on standard variable rates.The problem for existing homeowners was that most lenders kept very quiet about their tracker mortgage rates.

The two largest lenders, Bank of Ireland and Permanent TSB, were among those who decided to restrict their lower tracker rates to new customers only, keeping existing customers on the higher standard variable rates of 3.6 per cent and 3.55 per cent respectively.

Even first-time buyers who opted for one-year discount offers were then classed as existing borrowers by the time that the discount expired and shoved onto the higher rates.

EBS estimates that as a result of this ringfencing of the rate applied to existing customers, mortgage holders in the Republic are overpaying approximately €119 million in mortgage repayments every year.

"For too long, institutions have been offering discounts and short-term pricing in the market to attract new business, while restricting existing customers from availing of better deals," says Dara Deering, head of EBS mortgages.

For example, a borrower with a mortgage of €300,000 being repaid over 30 years will have monthly repayments (before mortgage interest relief) of €1,364 if they are on Bank of Ireland's standard variable rate of 3.6 per cent.

The borrower could try threatening to leave if the bank doesn't move his or her loan onto its lower tracker rates, or they could take either EBS or Ulster Bank up on their offer of a free switch.

At EBS, as the loan is higher than its €250,000 threshold, the borrower would qualify for a tracker rate of 3.15 per cent, or 3.1 per cent if the value of their property has increased so that their outstanding loan is less than 80 per cent of the property value (loan-to-value or LTV).

At Ulster Bank, the borrower would also qualify for a rate of 3.15 per cent, a rate open to all customers, regardless of the size of the loan or the LTV. If they paid bank fees of €108 a year for its U-First current account, they could reduce this rate further to 3.05 per cent.

A lower interest rate of 2.95 per cent is available if the property price has increased so much since the borrower first took out the mortgage that the LTV is now less than 60 per cent. U-First account holders can again go one better and get a rate of 2.85 per cent.

This means that if the borrower paying a rate of 3.6 per cent switched to either EBS or Ulster Bank, the monthly savings would be at least €75 and at most €114 - taking into account the U-First bank fees - thanks to the lower interest charges.Over the course of just one year, this results in savings of €900-€1,368.

Borrowers are not restricted to either Ulster Bank or EBS if they want to make a free switch. Some mortgage brokers offer to pay the full legal fees if borrowers use their services.

They do this by sharing the commission they receive from the lender with their panel of solicitors.

One such broker is NC Mortgage Brokers. Under its Switch and Save offer, it will pay legal fees up to €999 on switches to a variety of lenders, as long as the outstanding balance on the mortgage is at least €250,000. The brokers will also pay the valuation fee of €127.

For all mortgages less than €250,000, NC will pay up to €499 plus valuation fee. If borrowers want to use their own solicitor, the maximum NC will pay toward costs is €800, "because we can't write a blank cheque", explains Ronan Mackay, new business executive at NC.

The offer is available in the case of all lenders who use title insurance, a type of remortgaging provided by a company called First American that facilitates mortgage switching in as little as 10 working days.

This timescale is a best-case scenario, according to Mackay. "Realistically speaking, you are looking at three weeks," he says.

NC's offer is open to borrowers who want to switch purely to save money. It is not available where the customers want to take the opportunity to borrow extra money or consolidate their loans.

In theory, however, people switching to a lower interest rate could borrow extra money and still have the same monthly repayments, Mackay adds. "Some lenders are quite picky about it though. Ulster Bank will ask you what you are doing with it and if it's a home improvement job, they will look for estimates. Permanent TSB or IIB won't," he says.

One lender to which it is currently not possible to switch through the brokers is National Irish Bank (NIB), which traditionally has not used brokers to distribute their loans. But the bank, which was bought by Danish financial institution Danske Bank last year, is currently conducting a pilot scheme with brokers and it is expected that this will be extended next year.

For the moment, NIB pays €600 toward the legal fees of anyone who wants to switch their mortgage to its books.

With both NIB and Bank of Scotland (Ireland) expected to come out with competitive mortgage products over the coming months, some borrowers might want to hang on a little while before they submit themselves to the inevitable paperwork.

But wait too long and the potential savings they will lose out on will mount up.

• People on fixed-rate mortgages are restricted from switching mortgages because lenders charge hefty penalties known as redemption fees if the borrower wants to make an early exit from their fixed-rate contract.

• Borrowers are required to take out a type of life assurance known as mortgage protection, which will clear their loan in the event of their death. The term of the policy matches the term of the mortgage, so if a borrower wants to extend the term of their loan as they are switching lenders, they will have to get new life cover and perhaps pay higher rates.

• Most lenders offer lower interest rates to borrowers with low loan-to-value (LTV) ratios. For example, if your house is worth €300,000 on today's market and the outstanding mortgage is just €150,000, then the LTV is 50 per cent. The longer people have owned their property, the lower the LTV is likely to be.

• First-time buyers will be tempted to opt for a one-year discount rate. But before accepting an offer, buyers should make sure what rate they will revert to once the offer expires.

• Over the life of a mortgage, it is likely that no one lender will remain the best value all the time. Borrowers should keep tabs on the interest rates they are paying and compare notes with other lenders at regular intervals if they want to reduce their total borrowing costs.