Many options open to mortgage holders making the switch

Dublin MEP Brian Hayes calls for legislation to facilitate Irish borrowers to switch lender

 Brian Hayes has banged the drum about “rip-off” mortgage rates being charged in Ireland at a time when the European Central Bank’s main rate is zero. Photograph:  Eric Luke

Brian Hayes has banged the drum about “rip-off” mortgage rates being charged in Ireland at a time when the European Central Bank’s main rate is zero. Photograph: Eric Luke

 

After a bruising time recently as director of elections with Fine Gael, Dublin MEP Brian Hayes has thrown himself back into his work in the European Parliament.

Among other things, he has called for legislation or the introduction of a code of conduct to facilitate Irish borrowers in switching their mortgage to a different lender at a cheaper rate.

Since becoming an MEP in 2014, Hayes has banged the drum about “rip-off” mortgage rates being charged in Ireland at a time when the European Central Bank’s main rate is zero.

The average variable mortgage rate in the euro zone is almost two percentage points lower than in Ireland, where many are paying a rate in excess of 4 per cent.

Hayes has now turned his attention to mortgage switching. He cited Italy as an example of a country where mortgage switching is high, underpinned by legislation. In 2015, about a third of new mortgages in Italy involved borrowers switching to a new lender in search of a cheaper loan.

The Irish MEP wants the next government to introduce a similar regime in Ireland to assist people in getting lower interest rates from their lenders. He might be on to something, but it is questionable if legislation is required to achieve this aim.

Mortgage switching in Ireland is negligible at the moment. Figures from the Banking & Payments Federation Ireland show that just 1,338 mortgages to a value of €290 million involved switching last year. For comparison, the total market for new lending in 2015 was €4.9 billion.

An economic letter published by the Central Bank of Ireland last July found that, among the five main retail banks, the average number of incoming switchers per month since January 2014 was just 38 out of about 684,000 mortgages.

Of course, switching wouldn’t make sense for about half of Irish mortgage holders who are on trackers with an average interest rate of just 1 per cent.

Another third of the market could make savings but are not in a position to switch for various reasons, including being in arrears, being in negative equity, holding a fixed-rate loan, having a loan-to-value ratio of more than 90 per cent or having an amount left on their home loan that is so small it wouldn’t make sense to move.

Incentives

There are costs involved – about €1,200 between legal fees and a valuation report – but the analysis said 70 per cent of potential switchers would recover the net cost within one year.

There are certainly plenty of offers available to switchers. For example, Bank of Ireland and Permanent TSB are offering 2 per cent cashback to switchers, along with other incentives, while KBC will give you €2,000 towards your legal fees, a 3.2 per cent variable rate and 50 per cent off your home insurance in year one.

According to the Central Bank, the cumulative savings across all mortgages in the 12 months after switching would be a tidy €65 million. In terms of total savings over the lifetime of the loan, 26,955 of switchers could save more than €10,000.

So why aren’t more people switching? Michael Dowling, chairman of the Irish Brokers Association’s mortgage committee, said there were two main reasons why people don’t switch: they are put off by the paperwork and potential costs or they get a better offer from their existing lender once they indicate that they are thinking of moving their loan to a rival bank.

There may be another reason. People are afraid of making the wrong decision. Switching a mortgage means you are taking out another home loan, and you have to go through all the hoops involved in satisfying the new bank about your income and creditworthiness. This can be draining even for straightforward applications but is worth doing given the savings.

On a positive note, switchers are not subjected to the Central Bank’s macroprudential rules on deposits and loan-to-income limits.

The Central Bank’s letter from last year suggested that “increased information” and “greater transparency” would be “beneficial” in promoting switching. This wouldn’t do any harm but is unlikely to solve the problem of customer inertia, long the friend of Irish banks.

All mortgage holders not on a tracker should investigate switching as a way of saving money. What have you got to lose? Twitter: @CiaranHancock1

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