Moving mortgage is worth a little effort

Opinion is divided as to whether NIB has made the first strike in a mortgage war, writes Laura Slattery

With the launch pad for new mortgage products and gimmicks in action almost weekly, it is understandable that borrowers and would-be borrowers feel a little like the bewildered bus passengers in the Financial Regulator's television advertisement.

"I don't know what a tracker mortgage is," confesses one of the confused commuters, while another admits she doesn't know how to save money on her car insurance.

This natural aversion to boring money matters means many mortgage borrowers would rather suspect they are paying a little over the odds than have to deal with their financial affairs. However, the combination of consumer inertia and blissful ignorance about financial products is costing consumers a lot, not a little.

What seems like a tiny difference in interest rates between two mortgages can lead to tens of thousands of euro of extra interest payments over the life of the loan.

Having made an aggressive bid to convince homeowners to switch their mortgages to its books last month, National Irish Bank (NIB) is now counting on homeowners to overcome their form-filling phobia and take up its offer of a mortgage with an interest rate that can be as low as 3.75 per cent.

To put this interest rate into context, a borrower who repays a mortgage of €300,000 over 30 years at a rate of 3.75 per cent over the life of the loan will pay €200,000 in interest. However, a borrower who is charged a typical rate of 4.35 per cent over the period will pay €237,000 in interest.

Effectively, they are flushing €37,000 down the drain. NIB is targeting existing homeowners who have built up equity in their homes as a result of rising house prices, rather than first-time buyers seeking their first mortgage.

Their "LTV mortgage" is aimed at people who probably borrowed the standard 92 per cent of the property value when they first bought their home but now have an outstanding mortgage that is equal to 80 per cent or less of the current property value. With house prices rising inexorably by double-digit percentage rates every year in recent times, it hasn't taken long for relatively new homeowners to meet those parameters.

For example, the buyer of a €300,000 house draws down a €276,000 mortgage - 92 per cent of the purchase price - to be repaid over 30 years. Over the next two years, the property rises in value by 20 per cent to €360,000.

Meanwhile, the borrower has also made significant dents in their loan through their monthly repayments, meaning their outstanding loan has now fallen to €265,000. The borrower's "loan- to-value" - the ratio of their mortgage to the value of their property or LTV - is now about 74 per cent.

So within just two years, the homeowner has qualified for the NIB mortgage.

The mortgage works by charging different interest rates to different portions of the loan under a pricing structure used in Denmark by its parent company Danske Bank. More precisely, the margin NIB charges over the European Central Bank (ECB) base interest rate - to which mortgage rates are either formally or informally linked - will vary depending on the loan-to-value.

A margin of 0.5 points over the ECB base rate applies to the first portion of the loan up to 50 per cent of the property value. A margin of 0.6 points applies to the next portion of the loan, up to 60 per cent of the property value and a 0.8 per cent margin applies to the final portion of the loan, up to a maximum of 80 per cent of the property value.

This all might sound unnecessarily complicated to many consumers, but in practice it is simply a very good deal. The highest average margin over the ECB rate that a borrower will pay is 0.59 points, which is far lower than the margins charged by other lenders.

Unhappily for all borrowers, the ECB's base interest rate has steadily nudged its way up this year to 3.25 per cent. This means NIB's interest rates range from 3.75 per cent to 3.84 per cent.

To find out which interest rate will apply to them, NIB has an online calculator. So, in the example of the borrower with a loan of €265,000 and a house worth €360,000 after two years, the calculator works out that the LTV is 74 per cent and the margin on the loan will be 0.57 per cent, giving a rate of 3.82 per cent.

Over the remaining term of 28 years, the monthly repayments will be €1,285. If the borrower sticks on a typical 4.35 per cent tracker mortgage, the monthly repayments will be €1,365.

So by not switching mortgages, the homeowner will end up paying €80 more a month, or €960 a year. Or to put it another way, their total interest bill (should interest rates stay along the same path) will be almost €27,000 more - a high price to pay for inertia.

Not everyone will be paying a rate as high as 4.35 per cent. Even before the launch of NIB's LTV mortgage, cheaper loans were available to people with lower LTVs. However, a generation of borrowers who never refinanced will actually be paying much higher interest rates.

If they took out their loans before the ECB tracker mortgages became common or if their lender simply didn't offer them a tracker rate, they could be on an expensive standard variable rate.

Standard variable rates can be as high as 4.78 per cent. The two biggest lenders, Bank of Ireland and Permanent TSB, charge 4.64 per cent and 4.6 per cent respectively. These two lenders were also among the last to introduce the cheaper tracker mortgages.

When they did, the best of the rates were kept for new customers. First-time buyers who chose the security of a fixed-rate mortgage in the first year or two were not given the lowest tracker rates when the term of their fixed rate expired.

This means that there are thousands of mortgage holders who are paying over the odds for the privilege of owning their own home.

NIB claims its product should appeal to the majority of the 650,000 Irish mortgage holders.

Among mortgage brokers, opinion is divided as to whether NIB's move is the first strike in a mortgage price war. Ulster Bank and EBS Building Society - in common with NIB - already pay the legal costs of switching.

Bank of Scotland Ireland (soon to be rebranded Halifax) will pay €1,000 toward the cost of moving to its Switch and Save discounted mortgage and €150 off the valuation. Its mortgage gives borrowers a margin of 0.45 points over the ECB rate for the first two years. After that, it tracks the ECB rate at a margin of 1 per cent.

The larger banks would find their profits hit if they were to offer such low rates, but that doesn't mean they won't fight a rearguard action to prevent customers from leaving.

"The bigger lenders cannot publicly display lower rates, but they will negotiate," says Michael Dowling, president of the Independent Mortgage Advisers Federation (Imaf).

Tell them you're leaving them over one curt telephone call and, while they won't exactly beg you to stay, they may significantly improve whatever it is they're offering.

In this way, borrowers can save thousands of euro without having to jump ship, without having to sign their name to a thing and without having to get to grips with the strange expressions used by mortgage advisers as their eyes glaze over.

Getting the best deals, however, requires a bit more work.