Beware banks promising improved mortgage deals

Against a background of increasing pressure from the Government to bring Irish mortgage variable rates into line with European competitors, banks are improving their offerings – if not always their rates.

Yes, Irish mortgage rates are still considerably out of whack with our European peers. For example, you can get a 20-year fixed rate in France for just 2.7 per cent, according to French Private Finance; or a tracker mortgage at 1.9 per cent above the ECB rate for 20 years. The best – in fact the only – long-term fixed rate in Ireland is from Bank of Ireland, and it's 4.4 per cent.

However, banks are looking to incentivise their customers in other ways, and in doing so, gain a greater share of the mortgage market as it rumbles slowly back into life. But, if you are in the market to switch your mortgage to get a better deal, trading up or are looking to purchase your first home, what do you need to know about the current slew of offers?

The cash backs When it comes to cash back, BOI looks to be top of the heap, promising 2 per cent of your mortgage back in cash. So for example, that if you buy a house for €220,000, you will have a mortgage of €198,000, based on the new Central Bank lending rules. So, your cash back will be €3,960 – enough to cover the cost of your €2,000 stamp duty, as well as the cost of your legal fees. And you might even have enough left over for a trip to Ikea.

The BOI cash back applies across the board to first-time buyers, investors, those trading up and those switching mortgages, and you have to draw down your mortgage by the end of the year to qualify.

If you're looking to switch, KBC Bank will give you €1,000 towards your legal fees if you make the move by year-end, while Ulster Bank will give €1,500 towards the cost of legal fees, after mortgage drawdown, until September 11th, and Permanent TSB will give you €1,000.

But remember, as always, to read the small print. For example, you can’t use the BOI deal as a way to circumvent the new Central Bank lending rules by coming up with a smaller deposit, as the mortgage has to be drawn down before you can access it.

"Any lending institution should be looking for the individual to have the money upfront; they shouldn't be using it (the cashback) to reduce their deposit," says Ken Murray, director at the Association of Expert Mortgage Advisers.

And with the deal from BOI for example, if you repay your mortgage within five years, you may have to repay the €3,960. While you might think this is unlikely, such a position would arrive if you looked to switch your mortgage, so the cash-back is in effect tying you to the bank to a certain extent. KBC Bank also says it may seek to claw back its €1,000 legal fees offer if the mortgage is redeemed within three years.

To get the deal with PTSB, which expires at year-end, you must open a current account that has at least €1,500 paid into it within five weeks of drawing your mortgage, and your mortgage repayment must come from this account.

Discounted home insurance

Another common incentive from lenders is to give you a low-cost home insurance policy for the first year. But are these actually worth much?

AIB, for example, is offering first-time buyers a 30 per cent discount on home insurance, while KBC Bank is offering first-time buyers, movers and switchers 50 per cent off KBC Home Insurance, which is underwritten by Zurich. For example, according to a home insurance survey from Consumerhelp.ie, Zurich is quoting €386 for a four-bed semi-D with a rebuild cost of €230,000 and contents of €70,000 in Cabinteely, south Dublin, so you would save €193 on such a policy. The cheapest quote was €314 from FBD so KBC's offer is worth something to you.

If the KBC home insurance policy is cancelled before the first 12 months has expired, KBC reserves the right to request the customer to refund the balance of the premium.

And don’t think you can sign up and then switch – with KBC for example, if the policy is cancelled within the first 12 months, the bank may request you to refund the balance of the premium.

Free financial advice

Once a bank has your mortgage business, it may be keen to sell you other products. AIB, for example, is offering a consultation with an AIB financial adviser as part of its range of mortgage incentives. This includes an assessment of your life insurance, specified illness and income protection options.

Remember, however, that while this can be a valuable exercise, and it is useful to get an assessment on how well protected you are. Most banks act as “tied agents” and can thus only offer a limited range of products.

While these products may be some of the best on the market and the most suited to your needs, it is difficult to be sure when you're not being given the choice. For example, KBC Bank, EBS, Permanent TSB, Ulster Bank and AIB are all tied agents of Irish Life, which means that they only sell its range of protection products. Bank of Ireland's protection products are underwritten by its insurance arm New Ireland.

Deferred start

Back in the day, banks typically offered the option to new homeowners of getting a deferred start on their mortgage. This allowed them to draw down the mortgage in June for example, but only start making monthly repayments in September.

While not that common now, AIB says it will offer first-time buyers a three-month deferred start, “subject to approval”.

But, while it sounds attractive, remember that this option will cost you more in the long run. Yes, having three months “rent-free” will allow you to redirect your money towards floors, kitchen appliances and a host of other home essentials. But you will still be charged interest on these months, which will be added to the original loan. This means that your mortgage is growing before you even make your first repayment.

Longer approval times

You may have heard the ads promising longer approval periods to help you find your dream home.

Permanent TSB, for example, has built a marketing campaign around offering a longer approval period of 10 months. But is this fact or fiction?

Financial adviser Kevin McNerney of First Rate Financial Planning notes that banks in Ireland typically offer a 12-month approval period. This means that you have six months approval in principle, which gives you six months to find a property, followed by a six months loan offer period, which allows you time to close the deal.

If, however, you fail to find a property within the initial six months period, you will then have to resubmit your financial information.

With Permanent TSB’s offer, you will have loan approval for four months, and the bank will give you a further six months to close the deal and take possession of your property. However, if you don’t find the property within those initial four months, it seems that you will still need to submit your financial information to get approval on another property.

A mortgage adviser in your office It’s a new trend, whereby instead of you taking the time off work to visit your local bank branch, you can simply arrange for a “mobile” mortgage adviser to come to you.

Ulster Bank, for example, has 10 such advisers who travel “here, there and everywhere” to discuss mortgages with you. This can be at work, at home or in a local cafe, and the bank currently serves the Dublin, Cork, Galway, Limerick, Kildare, Meath and Wicklow regions.

Likewise, you can set up a meeting with a mobile manager with Bank of Ireland via its website.

It’s undoubtedly convenient, as many managers will arrange to meet you outside of normal office hours in the evenings and weekends, and it means that you don’t have to travel any distance to meet with them.

But don’t feel under any pressure to go with the bank that has travelled to meet you, or with whom you may have developed a personal relationship.

It’s all about the rates

And finally, and most importantly, interest rates. Cash backs, mobile mortgage managers and deferred start options are all nice little incentives to entice you to bring your business to a certain bank. But remember that when it comes to a loan over 30 years or so, the only thing that really matters is what rate you’re borrowing the money at. Consider Bank of Ireland’s cash- back offer, for example. On a €220,000 property, your cash back will be of the order of almost €4,000, but if you opt for a variable rate, you could pay considerably more for that cash back.

For example, if you had gone for the cheapest variable rate on the market, from EBS at 3.95 per cent, you would be paying €768 less a year in repayments. In five years (all things being equal) you would have made back your cash back – and over 30 years, you could have saved yourself almost €20,000. The savings are less if you had opted for a fixed rate, as BOI’s new fixed rates are much more competitive.

As Murray notes, banks are now largely competing on fixed rates. Indeed it’s likely the only way Irish rates will fall to a level enjoyed by our European counterparts – despite the efforts of Government – is if new entrants come into the market. But as of yet, this doesn’t seem to be happening.

But this is not to say that competition isn’t working at all. Already rates have fallen, and one place this is most evident is in the switching market.

While Murray asserts that if your loan-to-value has fallen by virtue of paying down your mortgage or rising property prices, your own bank may not offer you a lower rate based on a lower loan-to-value. But this doesn’t mean you shouldn’t be trying to cut a deal with them.

“It’s worth having that conversation; if they say no you can then pursue remortgage options,” he says.