How to turn rising house prices into a cheaper mortgage

Have you thought about your LTV lately? No? Do you know what it is? Well, it might be time to find out, because if you purchased a property anytime after 2012-2013 and locked into a high standard variable or fixed mortgage rate, you should now be looking at a reduction on your monthly mortgage repayments, thanks to the sharp rise in house prices since then.

If you purchased with a 10 per cent downpayment at the time, you would have been offered an interest rate based on your LTV or loan to value – ie the cost of your mortgage was higher as the proportion of the loan to the value of your home increased. So you pay a higher interest rate on a loan that covered 90 per cent of the purchase price than one that covered, say, 80 per cent.

But, as house prices have risen, the debt on your property will have shrunk as a proportion of its current market value, which means it could now be the time to query your lender’s approach and ask for a reduction based on a lower LTV. As our figures show, you could save yourself a substantial sum of money over the coming years.

While much of the focus is on switching lenders to save money, an easier move – albeit one that may not save you as much in the long run – is to “switch” products with your own lender. And it seems that not enough of us are doing it.

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“People tend to be very slow to make any decisions with their finances when it comes to houses,” says Seán Couch of the Dublin Mortgage Company, even though there are “big savings there”. And the greater your mortgage is, the greater the savings to be made.

So how does it work?

Why does LTV matter?

Offering different mortgage rates based on different LTVs was first pioneered by National Irish Bank back in the boom years. Most lenders now differentiate between their customers, offering the cheapest rates to the less risky based on the amount of equity the homeowners have in their properties, and offering the highest rates to those who purchase with the smallest deposits. EBS is an exception, as it offers an LTV incentive to new customers only, while AIB restricts it to variable rates.

If you’re a first-time buyer, for example, borrowing 90 per cent of the purchase price with AIB on a variable rate, you’ll pay interest of 3.5 per cent on your mortgage; if you have a downpayment of 50 per cent, however, your interest rate will be 40 basis points less at 3.1 per cent. This equates to savings of about €45 a month on a €200,000 loan.

For most first-time buyers – and second-time buyers too who may be leaving their first property with little equity – buying at an LTV of 80 per cent or less may be near impossible, so the difference in rates may not matter.

But for homeowners who bought properties over the last five or so years, it is an opportune time to pick up the phone to your lender and find out can you renegotiate your mortgage rate based on a lower LTV.

As house prices grow, LTV shrinks

Since 2012, house prices have rebounded sharply, particularly in urban areas such as Dublin. While they may still be some way off the peak – nationally, house prices are still 30.7 per cent lower than their peak in 2007, while Dublin residential property prices are 31.3 per cent behind their February 2007 peak – they have still reported substantial advances.

For example, since 2012, the price of an “average” houses in Dublin has risen by 47 per cent, from €243,155 to €358,371. This means that someone who bought a three-bed house in Dublin back then will have seen a substantial rise in the value of their property.

A homeowner in Galway will also have enjoyed a substantial, if more muted, price rise of about 37 per cent since 2012.

If our Dublin property buyer had bought their property in 2012 with a deposit of 10 per cent (and a mortgage of €218,839), their LTV will have since shrunk from 90 per cent to less than 50 per cent today thanks to the combined effect of the rise in property prices, and the fact that they have paid down the mortgage over this time.

And this means substantial savings.

Bank of Ireland, for example, recently cut its two- and three-year fixed rate to 3 per cent for homeowners with an LTV of less than 80 per cent, while KBC Bank’s market-leading rate of 2.9 per cent is also offered for homeowners with LTVs of less than 90 per cent.

So by locking into a sub-80 per cent rate, homeowners can knock some much-needed euro off their mortgage bill every month. All for the probable cost of a phone call and the effort of filling out a form.

Do I need a valuation?

Some banks may request you seek an independent valuation to verify the value of your property – and it will be at your expense. Bank of Ireland, for example, does so, as does AIB, which says the cost of a valuation by a panel valuer of the bank is €150. However, paying €150 or so now, and saving thousands over the short to medium term makes sense, so don’t let it dissuade you from following through.

Why not switch lenders?

If your lender does not offer a better deal based on your LTV, or you can simply find better rates elsewhere, it can make a lot of sense to go the whole way and switch lenders. Unfortunately, Central Bank figures show that we’re particularly abysmal at doing so and without competitive pressure from borrowers, lenders will feel less inclined to improve their offerings.

But this doesn’t mean that you shouldn’t try.

You may well find that the cost of doing so will be minimal, as many banks offer a cash sum to those switching. Ulster Bank, for example, offers €1,500 towards the cost of legal fees, while AIB will give you €2,000, and KBC Bank is offering €3,000 up until September.

Potentially more lucrative, depending on the size of your mortgage, are the current “cashback” deals. PTSB, for example, offers a 2 per cent cashback, while Bank of Ireland is offering up to 3 per cent of the value of the mortgage back for customers looking to switch.

Seán Couch sounds a note of caution in choosing a lender solely on the basis of a current offer, however.

“You’re really better off looking at rates than the cashback offers,” he says, noting that a lower rate should save you more in the long term.

Given the level of incentives to switch on offer, for some it could make sense to switch regularly. One customer of Couch’s for example, with a €700,000 mortgage, was thinking of moving to get a cashback of about €14,000 now, with a view to moving again to another lender after the fixed-term period is finished, and benefiting from another cashback offer.

After all, banks can’t claw back cashback offers if customers leave after a number of years. But it should be thought through carefully.

“It’s a big risk to take, because a person’s circumstances could change,” Couch says. You might find in three years’ time that the switching market has changed, or you are no longer in your current job, and won’t be entitled to as much of a mortgage again, and you’ll be stuck paying over the odds perhaps on a higher rate.

“The lowest rate is safest in the long term,” he says.

The incentives on offer mean that the only effort will be your time. That’s not to dismiss entirely the effort involved as the time it takes to complete the process can be considerable. Switching mortgages is akin to getting a mortgage for the first time, and requires the same underwriting. In practice, this means getting six months’ worth of bank statements, pay slips, credit card bills, etc.

And if you’ve recently racked up credit card bills due to an expensive few months doing up your house, or have changed jobs or gone part-time lately, this can preclude another lender from giving you a mortgage.

While the Central Bank is currently looking into how it can make the mortgage switching process easier, perhaps by cutting down on the necessary paperwork, for now the only option to persevere.

The upside is that the savings can be considerable.Switching from a variable rate of 4.5 per cent with Bank of Ireland, for example, to a variable rate of 3.7 per cent with KBC Bank, will save you about €140 a month on a €300,000 mortgage.

Don’t bank the savings

While savings of €100 or so will be very welcome in the monthly household budget, if you can, try not to let it get swallowed up by heating or insurance bills.

Using the money instead to overpay your mortgage each month will save you a hefty sum in the long term, and may also reduce the term of your mortgage.

Consider someone 10 years into a 30-year €300,000 mortgage. Today, on a rate of 3.8 per cent, their monthly repayments are about €1,786. By dropping to a rate of 3.1 per cent, their payment will drop to about €1,678 a month, so they will save €108 a month.

If they continue to overpay their mortgage by this €108 a month, they could make €9,073 in interest savings as well as knocking a year and seven months off their mortgage term, which means further savings of €31,882 thanks to having no mortgage payments during those final 19 months of the original mortgage term.

By contrast, banking the money in a savings account at an interest rate of 3 per cent a year (even if you could find such an offer) would yield lower overall savings, of some €35,000.

Remember, of course, that if you opt for a fixed rate, some lenders may charge you for overpaying your mortgage.

Others do not impose charges for overpayments. Bank of Ireland, for example, allows you to overpay by €65 or 10 per cent of your monthly mortgage repayment even if you are on a fixed rate, while Ulster Bank allows you to overpay by up €1,000 each year without incurring an early-redemption charge.