Banks like us to think they’re open for business for switching mortgages. They offer attractive incentives such as cashbacks and free legal fees and it’s a wonder more people here don’t switch.
If you’re considering switching mortgage provider, there are a few important factors to consider.
The first is that many of us are unaware of is that mortgages taken out via a broker may be subject to a clawback on commission if the borrower looks to switch within three years. This clawback can be a significant amount of money, which could outweigh the benefit of switching.
For example, when you take out a mortgage through a broker (and with Bank of Ireland returning to this market next month, the offering is set to increase) the intermediary is typically paid for their work on the transaction through a commission structure with the lender.
Bank of Ireland, for example, is set to pay commission of 1 per cent, as does AIB’s subsidiary Haven. On a €300,000 mortgage, this will work out at a payment of about €3,000 for the broker.
What borrowers may be less clear about, however, is that if they switch this mortgage within a specified time frame, their lender will look to claw back all, or some, of this commission from the broker, meaning the borrower could be impacted, too.
And they shouldn’t expect the lender to be explicit about this. When I asked the main lenders about this provision – AIB/EBS, Bank of Ireland, Permanent TSB, Ulster Bank and KBC Bank Ireland – all but two declined to comment on the grounds that the information was “commercially sensitive”.
Bank of Ireland and PTSB were the only banks to answer the question, with both confirming that commission paid to brokers can be clawed back if the mortgage is redeemed, or switched, within three years of drawdown. But the practice, say brokers, is widespread, and typically works on a declining basis.
Banks might reason that clawback is justified because a mortgage needs to be held for three years before it starts to make money on it, but with the heavy weighting of interest payments in the early years, this claim is dubious.
Brokers, unsurprisingly, hate it, and argue that they have done the work so should get to keep their payments.
What about the consumer? While some brokers might simply stomach the charge if their customer makes a switch within the three years, many others will pass that invoice directly on to the customer. Take a look at your broker agreement – you might find a note on how early redemption may involve a commission clawback, and “this may be passed on to you”.
Getting a fix
Another issue arises with the industry-wide drive towards fixed rates, with lenders continuing to offer their best rates to customers who opt to fix. At Ulster Bank, you can get a rate of 2.3 per cent fixed for two years when you borrow up to 90 per cent of the purchase price of the property – or pay almost 4.4 per cent on a variable rate.
This focus on fixed rates means that about 65 per cent of all new mortgages (ie not including trackers) are now on fixed rates – the highest figure since the Central Bank of Ireland started recording this data, some 15 years ago.
For the banks, getting customers onto fixed rates lessens the possibility of creating an active switching market.
If you are in a position to switch, why not make the most of it and do it a couple of times?
When banks first brought their incentives to market, many imposed restrictions on getting the cashback and moving on again swiftly after. However, the advent of the European Mortgage Credit Directive in 2016 has made it impossible for banks to claw back these incentives .
Now of course the banks are looking to get around this in other ways. For example, Bank of Ireland requires switcher loans to be drawn down for at least a year with the existing lender, while PTSB imposes a two-year requirement on such loans, which makes it difficult to chop and change with the lender, and EBS says you cannot avail of its 2 per cent cashback more than once on the same property.
However, some canny borrowers are finding their way around the obstacles. With a 2 per cent cashback on mortgage value a typical incentive – which works out as €6,000 on a €300,000 home loan – the gains can be significantly more than the legal costs incurred. One poster on Askaboutmoney.com claims to have made €18,000 from multiple switches. It’s something to keep in mind.