What should Ulster Bank and KBC mortgage holders do?

And just like that, about 28 per cent of the Irish mortgage market appears to be up for grabs with the confirmed departure of Ulster Bank and planned exit of KBC Bank from retail banking in Ireland.

KBC Bank has about a 12.6 per cent share of the mortgage market, while Ulster Bank has about a 15 per cent share, so losing both will have a big impact, particularly when you consider what they offered.

"If you were considering switching provider, two of the lenders you'd have considered were Ulster Bank and KBC Bank, as they were generally offering cheaper rates than most of the other providers and also contributed to switching costs," says Trevor Grant, chairman of the Association of Irish Mortgage Advisors.

But where does their potential departure leave existing customers?

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Your legal rights

First of all, it's important to note that, if you're a customer of either bank, you're under no pressure to switch. Given that the exit of the two banks –if they go ahead – may take some years to be completed, Liam O'Connor, sales director with Irish Mortgage Corporation says "there is no need to panic".

It is not yet clear where Ulster Bank's mortgage book will end up, although it may be Permanent TSB. When it comes to KBC Bank, Bank of Ireland (BoI) is looking to acquire its "performing" loan book. This means that mortgage holders who are customers of KBC would become customers of BoI, should the deal go ahead.

Those who are in arrears may not move to BoI.

In any case, whoever takes over your mortgage will have to honour the terms and conditions associated with that mortgage as they are bound by the Consumer Protection Code.

Thus, for example, tracker-rate customers will continue to benefit from their low lending rates regardless of who acquires the loan book. Similarly, if you are on a two-year fixed rate 2.3 per cent mortgage with KBC bank, if Bank of Ireland goes ahead and buys your mortgage, it will have to honour this rate.

“From an existing or potential KBC mortgage holders’ perspective, some comfort can be taken from the memorandum of understanding already signed with Bank of Ireland that will most likely see their mortgage taken over by one of our existing pillar banks. In addition, all existing terms and conditions continue to apply,” says O’Connor.

The issue, perhaps, is what happens then.

Both Ulster Bank and KBC have some of the keenest rates on the market at present. So, while it is still possible to lock into these rates over a two/three year period, if your mortgage is acquired by another lender within this period, what happens at the end of the fix period may be of concern.

“Your existing lender will set the new rate you revert to when you come off a fixed rate,” says Grant.

Your circumstances may mean that a switch is likely to be possible now while a few years down the line, with the arrival of children or a lower income, it may no longer be possible

So, will you for example, go from one of the keenest rates on the market to one of the most expensive? This is the risk of leaving your mortgage go with whoever acquires it.

It can also affect the flexibility of your borrowings. If, for example, a fund was to acquire these mortgages, rather than a lender like PTSB, it would close down any options for remortgaging or extending your borrowings.

So should you switch now and get ahead of this possibility? Well, the decision may in part come down to your ability to switch at this stage compared to some point in the future.

Switching eligibility

First of all, if you’re on a fixed-rate mortgage, you will be constrained should you wish to switch. This is because banks apply a break fee should you wish to get out of a fixed rate early.

The way banks calculate this is through a complicated formula. Ulster Bank for example calculates the amount using the following formula or six months interest, whichever is lower: redeemed amount x (R - R1) x time remaining in days until the end of the fixed rate period) divided by 360.

The easiest way to find out what sort of costs you might face is by ringing your mortgage provider and asking them for the fee.

“This will help you to determine whether or not it makes sense to switch your mortgage now or wait until the fixed period expires,” says O’Connor.

Remember, even if there is a cost associated with breaking out of your mortgage, it may be worthwhile, particularly if the bank you are switching to offers a lower rate. However, given the competitiveness of Ulster Bank and KBC Bank’s rates, this may be unlikely.

Second, you may fear that a change in your financial circumstances will make it difficult to switch.

“For example, a young couple may have started a family since taking out their mortgage where one spouse has now given up work to care for the children. So not only is their only one income coming into the household, there are also now additional dependants relying on that income,” says O’Connor.

“Others are worried as they had to give up work due to health issues or may have lost their job due to the ongoing Covid-19 pandemic. The fear here is that they will be at the mercy of the proposed new lender’s interest rates going forward which could result in an increase to their monthly repayments with not much they can do about it”.

On the other hand, your circumstances may mean that a switch is likely to be possible now while a few years down the line, with the arrival of children or a lower income, it may no longer be possible. This is something you need to consider if you decide to stick with your lender.

Mortgage switches are exempt from Central Bank rules, which means that you don't have to meet the rules on income – such as the mortgage being only 3.5 times your income, or the requirement to have a deposit of at least 10 or 20 per cent.

Given the uncertainty, particularly around KBC Bank, if you have just agreed to switch, or draw your first mortgage with KBC Bank, Grant suggests it may still make sense to go ahead.

“I don’t see a reason why you wouldn’t proceed with caution,” he says.

Switching options

If you are looking to switch, and you are on the lenders’ more competitive rates – as low as 2.25 per cent with Ulster Bank for example – switching is unlikely to be solely a financial decision. This is because the two lenders that are leaving had some of the best rates on the market.

Nonetheless, it should be possible to lock into rates as low as this with another lender, though this may depend on how much of your mortgage you have paid off. Typically, the best rates are available for those who lock into fixed rates, and whose mortgage is less than 80 per cent of the value of the property.

Cheapest of the bunch is Avant Money, which is owned by Spanish bank Bankinter, and now lends across the State to places including Athlone, Carlow, Dundalk, Kilkenny, Wexford and Portlaoise, in addition to the main urban areas. It has a market leading rate of 1.95 per cent, but this is only available to those whose mortgage is worth 60 per cent or less than the value of their home.

If your loan-to-value (LTV) is greater than this, your best option with the lender will be 2.2 per cent on a three-year fixed rate for LTVs of between 70 and 80 per cent, or 2.35 per cent should your LTV be more than 80 per cent.

Alternatively, and depending on the energy efficiency of your home, you could consider AIB. Its lowest rate is 2.1 per cent, available on homes with a BER rating of between B3 and A1. Similarly, Bank of Ireland offers a 0.2 percentage point discount on its "green" mortgage product, although you will need a higher BER, of at least A3 to qualify.

While getting a cash lump sum is attractive, remember that it will cost you more in the long-run

Permanent TSB has a new product for switchers, with a rate of just 2.25 per cent fixed for four years (note: you can't get cash back on this) for those with an LTV of less than 80 per cent, while Finance Ireland is also fairly competitive with its 2.4 per cent rate for those with LTVs of 80 per cent or more,

If you like the flexibility of a variable rate, tread carefully, as rates tend to be significantly higher, ranging from 2.95 per cent at AIB to 4.2 per cent at Bank of Ireland.

Cash backs

Many lenders offer cash incentives to encourage you to switch to them. Both Bank of Ireland and EBS, for example, offer up to 3 per cent of your mortgage back, while PTSB offers 2 per cent plus money back on a monthly basis.

However, while getting a cash lump sum is attractive, remember that it will cost you more in the long-run. As our table shows, the four most expensive mortgage providers all offer cash-back deals.

This is of even greater concern when one considers that the lenders involved (EBS and Haven are both owned by AIB) control about 70 per cent of the market. And with KBC and Ulster gone, this proportion will grow.

“A huge portion of the market is likely to be controlled moving forward by lenders offering the most expensive mortgage products,” says O’Connor.

Indeed even if one takes into consideration PTSB’s 2 per cent cash-back offer, it’s still the most expensive mortgage provider for the customer in the table.

If interest rates stayed the same, the total cost of credit on this loan would be €100,600, or €96,640, once the 2 per cent cash back is deducted. As a comparison, the total cost of credit with AIB's 2.25 per cent rate would be €74,465 – 25 per cent less than the PTSB product.

Other considerations

There may be other factors you will need to consider before you make a switch. One of these is whether or not you can overpay your monthly repayments, should you be in a position to do so. While opting for a lower term when you switch can have a similar benefit – that is, it cuts the cost of credit by resulting in a lower interest bill – it does tie you into the term. Overpaying on a monthly basis can offer greater flexibility should your finances ebb and flow.

Some lenders, such as Avant, do not allow you to do this.

Finally, remember there are costs involved in switching. Opting for a cash-back deal can help defray these costs, but will add up in the longer term.

You should expect to pay about €1,500 in legal fees to switch your mortgage, while a mortgage valuation will cost about €150. If you opt for a “green” mortgage you may need to show evidence of your BER cert, which can cost upwards of €100.