Property prices may be cooling, but after six or so years of consecutive growth, homeowners across Ireland will have nonetheless seen substantial rises in the value of their homes.
While this increase in value is meaningless in one sense, unless you’re planning to sell your property and move somewhere cheaper, it does present an opportunity for homeowners across the country to extract some of the value from this growth.
If you’re in the market for a kitchen extension, cheaper mortgage rates, or want to release equity to help a son or daughter buy their own home, how can you go about it?
1) Lower LTV = lower mortgage rates
While the country as a whole is tardy when it comes to switching mortgage provider, an easier first step can be to get a better rate with your own lender. And one of the most beneficial ways of doing this is by moving into a different LTV category.
The smaller your loan is, as a proportion of the value of your home, the less risky the bank will see your mortgage, and therefore the better rate it might offer you. Typically, you’ll need your loan to be worth 80 per cent or less of the value of your property before you can really start to save.
Note, if you’re on a competitive tracker mortgage you’ve already got a good deal, so stay where you are.
The first step in figuring out whether you might be entitled to a lower rate is understanding your loan-to-value (LTV), which basically means the size of your mortgage compared with the value of your property.
So, if you’re a recent first-time buyer, your house might be worth €200,000, and your mortgage €180,000 – so your LTV is 90 per cent. Now if you were this first-time buyer back in 2014, your house might now be worth €260,000, and your mortgage €140,000, which gives you an LTV of 53 per cent.
The banks’ approach
How much you can save will likely depend on which lender your mortgage is with. At AIB for example, all customers are offered the same fixed price point regardless of their LTV. This means that the bank now offers some of its best rates to all its customers. But not its best rate – this it reserves for those with who have an LTV of 50 per cent or less.
The bank now offers an attractive variable rate of just 2.75 per cent if you can get your LTV to below 50 per cent. This is the bank’s best rate and is cheaper than its best fixed rate, 2.85 per cent over three, four and five years.
If your LTV is less than 50 per cent, you might be best to go variable – if you’re not concerned about potential future increases. But if your LTV is greater than this, the next best rates are available on fixed-term products.
Switching from the standard variable rate to the variable rate allowed for those with an LTV of less than 50 per cent will save someone with a €100,000 mortgage over 30 years about €21.50 a month, or €258 a year.
KBC Bank offers discounts based on your LTV across both variable and fixed rates, which gives homeowners the most options.
If you’re a fan of variable, for example, the lowest rate on offer is for a homeowner with a LTV of 60 per cent or less at 3.2 per cent – significantly cheaper than the top variable rate of 3.5 per cent.
Again, however, the best rates are for those willing to lock in to fixed terms. If you’re happy with a one-year fixed rate, it won’t matter what your LTV is – all the rates the bank offers are at 2.7 per cent.
With a two-year fixed term, however, you’ll do better with a lower LTV, with 2.7 per cent available for those with LTV of 60 per cent or less, compared with 2.8 per cent for those on greater than 80 per cent.
An even bigger differential is available on the bank’s 10-year fixed rate. You’ll be stuck with interest of 3.95 per cent if your LTV is more than 80 per cent. But it’ll shrink to just 3.25 per cent if your loan is worth 60 per cent or less than your home.
Ulster Bank also differentiates based on LTV. Its cheapest variable rate, for example, of 3.5 per cent, is available to those with an LTV of up to 60 per cent. But its best rate – and the best rate on the market in fact – of 2.3 per cent fixed for two years, is available to all, irrespective of LTV.
2) More equity = lower renovation costs
The other upside of seeing the equity in your home increase is that it gives you more options should you want to release this equity.
Seán Couch, a director with Dublin Mortgage Company, says an increasing number of people are looking to top up their mortgage to renovate, given the shortage of new properties and the costs involved in moving.
For example, if you have a LTV of 60 per cent, it means that on a home worth €300,000, some 40 per cent or €120,000 of this, is equity.
This equity could, potentially, be released by way of “topping up” your mortgage to renovate your home, and you may find that it’s cheaper than opting for a personal loan. You may also have the option of repaying over a much longer time – up to 35 years with some banks.
With EBS, for example, you can borrow between €10,000 and up to 80 per cent of the value of your property – including your mortgage. This means that, if your home is worth €300,000, and your outstanding mortgage is €150,000, then you can borrow a further €90,000 to put towards doing up your home.
AIB adopts a similar approach. It allows you to borrow up to 80 per cent of the value of the property, again at a minimum of €10,000, while Bank of Ireland will give up to 80 per cent on equity release.
PTSB will go even further, and give you between €25,000 and up to 85 per cent of the current market value, again minus whatever you already owe. So, on the above example, you could borrow €105,000 with PTSB.
KBC will also give you up to 80 per cent, with attractive rates, from 2.5 per cent on a two-year fixed rate, while Ulster Bank will also allow customers to top up, but a spokesman says it is on a “case-by-case basis, subject to a maximum loan to value of 80 per cent”.
Some banks allow you to draw down equity from your home to put towards a deposit for a new home for a dependent family member
Remember, to release equity your bank might request an up-to-date valuation, which can cost you – AIB puts it at €150. And there are restrictions. PTSB requires that you have already had your mortgage with the bank for at least two years, with a good repayment history.
Couch notes that banks might also be hesitant to lend if you’re looking to borrow more than the ceiling for property prices on your particular road. In addition, you should expect the bank to only release payments in stages, dependent on engineer’s reports. Don’t think you can buy a fancy new car with your top-up.
And, while it’s not a decision that should be embarked upon lightly – after all it’s increasing the term, and ultimate cost, of the mortgage to you, while it also puts you at risk of falling into negative equity if property prices start to fall – it can be cheaper than a personal loan, as you’re borrowing at mortgage rates.
"Equity release can provide an affordable borrowing option for people who have equity built up in their home", says Brian Vaughan, head of mortgages at Bank of Ireland, adding, "it can help customers meet larger expenses with repayments spread over a longer term at a choice of low interest rates."
Consider a personal loan for €50,000 over 10 years at a rate of 8 per cent. This would cost you €606 a month in repayments, with a total cost of credit of €22,796. If you could get this through your mortgage at a rate of 3 per cent, the cost would plummet to €482 a month, and would cost you just €7,936 in total – or about 65 per cent less than the personal loan.
With the top-up option you can also repay the loan over the longer term. For example, repaying over 20 years would bring the monthly repayment down to €277 a month but you will pay much more in interest, at some €16,550.
Remember, however, that topping up a mortgage is the same as applying for a new mortgage, and involves all the same steps.
According to Couch, this can put people off borrowing €20,000 or so via this route, and instead they will often go to their credit union or get a personal loan instead.
If you are thinking of getting a top up, you should also consider switching lenders at the same time, depending on the rates available with your current bank.
“We have to do a new application anyway, and it’s the same documentation,” says Couch, which means you can lock into lower rates elsewhere at the same time as getting your top up.
3) Top-up mortgage to fund deposit for a child
If your child is struggling to get a deposit together for a home, or you would like to increase their down payment so they can borrow for the home they want and still meet the Central Bank’s mortgage rules, one option that might be available to you is to release equity to fund this gift.
Not all banks will do this, but some will.
Indeed both AIB and its wholly-owned subsidiary EBS allow you to draw down equity from your home to put towards a deposit for a new home for a dependent family member, while Ulster Bank said that topping up your mortgage for this reason would generally be considered to be an acceptable purpose, and Bank of Ireland will give you a top-up both towards a gift for a family member, and for repaying this gift.
As Couch notes, however, there can be “two dangers” to this approach.
Firstly, depending on your age, you’ll only have a limited time to repay the loan, as banks will typically only lend to about 68. The second is that you could be eating into funds that should be used for your own retirement.
And remember, if you’re topping up your mortgage, don’t forget to top up your life assurance, too.