Up to 160,000 Irish families are out of pocket every month – by as much as hundreds of euro – because they simply haven’t looked at switching their mortgage. Many don’t realise that rates are falling and that lenders are eager, and well-resourced, to entice you over to their deals.
But do the benefits outweigh the pitfalls, how do you go about it and why are so many us reluctant to do so?
Is it really worth all the hassle?
Well, you’re making an assumption that there is a lot of hassle. But we will come back to that. For now, the simple answer is yes, if you, like many, can avail of significant savings. Just last week, the Economic and Social Research Institute think-tank – which informs Government policy – reported that many Irish families could make “large gains” by moving a mortgages to one of their current lender’s competitors.
Days beforehand, the Association of Irish Mortgage Advisors (AIMA) estimated eight in 10 homeowners on a standard variable rate are “overpaying” by hundreds if not thousands of euro every year. That is up to 160,000 families paying over the odds because they haven’t looked at switching.
But aren’t we all paying over the odds in Ireland? Isn’t that just a fact of life here?
Compared to our European neighbours, you’re right. We still have second most expensive mortgage rates in the euro zone, after Greece. The overall average home loan rate in Europe is 1.37 per cent. Crudely put, that is about half the average 2.9 per cent rate here (2.8 per cent for fixed rates and 3.2 per cent for variable) .
The Banking and Payments Federation of Ireland (BPFI),which represents the mortgage lenders, says the average first-time buyer takes out a home loan of €225,000. Obviously that would be little higher in Dublin, and somewhat less outside the capital but let’s take that average as an example.
If you were borrowing that amount over 30 years – at the average mortgage rate of 2.9 per cent – you would be paying an extra €174 each month in Ireland compared to average borrower across the euro zone. That’s more than €2,000 over a year, which could be spent on healthcare, childcare, education or paying off debts, to mention but a few things.
So it is just a fact of life here then?
You will not be getting as good a deal as our friends in Germany or France anytime soon. But, as more competition creeps into the Irish market, rates have been very slowly coming down in recent years.
Banks left Ireland during the recession: for example, Halifax, and Danske Bank closed its residential operations. But with the recent arrival of non-bank lenders like Finance Ireland and more people looking to switch within the key lenders here – mainly AIB and Bank of Ireland, and to a lesser extent Ulster Bank – they are all being forced to offer better deals.
An Post is also hoping to start offering mortgages soon, and even the credit unions are getting in on the game – more than 100 credit unions countrywide are now offering home loans.
What kind of savings can I expect to make?
Let’s say you are a couple who took out a 30-year mortgage of €300,000 two years ago at 3.5 per cent. According to calculations by mortgage advisers at AIMA, you could save almost €140 every month by switching to a five year fixed rate 2.5 per cent loan. Moving on to a 2.95 per cent standard variable rate mortgage would put an extra €85 in your pocket every four weeks.
It is true that when you switch your mortgage, the process you go through is quite similar to when you first took out a mortgage, and that puts a lot of people off
Borrowers on a 3.9 per cent mortgage of €350,000 over 25 years could save more than €230 or €160 respectively every month by making the same switches.
"Many people got the best deal available at the time when they took out their mortgage and they understandably assume it is still the best," said AIMA chairman Trevor Grant. "However, the reality is that it's probably out of date by now. Others believe that if they remain loyal to their current bank, it will be reciprocated in some way – which is an absolute fallacy."
There are rates as low as 2.5 per cent out there?
And less. The lowest rate on offer at moment is 2.25 per cent from KBC. You need to have 40 per cent equity on your home, so it might not be a runner for everyone. The same lender also has 2.3 per cent fixed rate with less onerous conditions, while Ulster Bank also offers a 2.3 per cent rate.
"If you are paying an interest rate of more than 3.5 per cent or 4 per cent on your mortgage, you could really save good money," says Daragh Cassidy of switching website Bonkers.ie. "Your mortgage should be just like any other bill. You should be looking at switching every few years or at least looking in on it to make sure you are getting the best deal."
Why are we so reluctant to switch our mortgages?
Switching rates generally across services in Ireland are beginning to improve. We are getting better at changing providers of utilities like gas and electricity, compared to other countries. Recent research shows about 30 per cent of us switched broadband and TV provider in the last three years. About a fifth changed their gas supplier in 2018, compared to 14 per cent who switched electricity provider.
But mortgages – like credit cards and current accounts – is an area where we need to get better at shopping around.
“There are a few reasons,” posits Cassidy. “There is perhaps a little bit of inertia, a fear that the process will be too difficult and maybe people not realising what they could actually save. Some people feel there is a lot of hassle involved.
“It is true that when you switch your mortgage, the process you go through is quite similar to when you first took out a mortgage, and that puts a lot of people off. But when you look at the figures, and what you could save – up to €200 or €300 a month – it is a case of nothing ventured, nothing gained. There is a huge amount of money to be saved.”
Switching isn’t open to everyone, however. For example, if you have changed jobs since you first got your mortgage and you are not earning as much or if you’re in negative equity or have missed repayments, it might be difficult.
The closer you are to the end of your fixed term, the lower the charge will be – in some cases it can be negligible
Also, it goes without saying that if you are on tracker rate of, say, the European Central Bank rate plus half a percentage points, you are not going to get a better deal, so there is no point even looking.
But if you’re at the mid to higher end of the mortgage rate range, it is well worth at least taking at look at your options. If nobody is willing to let you switch, that’s fine – it’s not the end of the world. “You’ll likely find out very quickly in the process whether or not your switch will be accepted, before you incur any legal costs,” adds Cassidy.
If I’m on fixed rate, does that bar me from switching?
Technically, if you are on a fixed rate offer currently, you are locked in to it but you can get out of it by paying a breakage fee. The banks have a very specific formula as to how they calculate that fee, and there has been a perception – well-founded – that they are prohibitively high.
“But they have come down in recent years, because interest rates are now much lower,” says Cassidy. “Obviously, the banks aren’t shouting about this but you could find the charge is only a few hundred euro, and you will make that up the savings in the medium term. If the charge is thousands of euro, it might make sense to wait until your fixed term ends.
“The closer you are to the end of your fixed term, the lower the charge will be – in some cases it can be negligible.” Your bank has to let you know what that charge will be if you ask them.
How do I go about switching then?
The first thing to do is to log into your online banking or telephone your bank and ask them what mortgage rate are you currently paying, what is the term remaining on mortgage and what is the amount owed outstanding. Armed with these three pieces of information, you can use a number of online mortgage calculators, run by lenders and comparison sites, including one by the Competition and Consumer Protection Commission at ccpc.ie.
If the savings look good, get in touch with the lender offering a deal that suits you and tell them you want to switch to them. Lots of the lenders have switching teams in place. They will send out a switching pack. You fill that in with information they want and take it from there.
You mentioned hiring a solicitor again?
Legal costs are one of the things most likely to deter people from switching mortgage providers or rates. Inevitably, these are required and it is a cost that must be taken into account when assessing the wisdom of making a move.
Cashback offers have a role to play in Irish market, as long as people go in with eyes wide open and know what they are signing up for
However, mortgage brokers at AIMA note that the costs should be lower than those incurred when you first took out your home loan. And they point out that all the main lenders appear to be offering some form of payment, or cashback offer, to help switchers cover the cost.
This could be a flat sum or a percentage payment of the value of the loan, potentially offering a windfall rising into several thousand euro.
But did I not read about being wary of these incentives?
You did indeed. The ESRI only last week warned borrowers could be drawn into making poor decisions under the lure of the cash offers. It carried out a study which showed many would-be switchers were “initially drawn” to high cashback offers with little or no understanding of the APR (annual percentage rate) implications.
On average, consumers opted for €2,200 cashback over a 0.4 per cent better APR – a move that would leave them worse off. But the ESRI also found that, where mortgageholders made themselves better informed, they placed much more weight on the rate.
“Cashback offers have a role to play in Irish market, as long as people go in with eyes wide open and know what they are signing up for,” says Cassidy. “Deals offering cashback are usually higher than those mortgages not offering cashback. Three of the best rates at the moment – at Finance Ireland, KBC and Ulster Bank – don’t come with cashback.
But if you are switching to a lower rate and getting cashback it should more than offset the costs.”
Anything else to consider?
It might be worth having a look at “green” mortgages, which are getting more popular. They offer reduced rates of interest if your home has a high BER energy rating – A or B, typically. AIB is offering a five-year fixed rate of 2.5 per cent on these mortgages.
Anyone who has done a deep retrofit of their house in recent years, improving their energy rating up to A and B bands, might want to consider if they can make some money back on it with cheaper mortgage repayments as well as improved fuel bills.