Switching your mortgage can bring significant financial benefits

"It's the best time EVER to take out a mortgage" the headline on the Daily Mail roared in early February, urging readers to either buy or remortgage, given that a two-year fixed rate mortgage can now be taken out at just 1.19 per cent in the UK.

Here in Ireland, however, Irish homeowners are paying significantly above the odds. Yes, you can argue that the UK sets its own rates as it’s outside the euro zone so it’s not relevant, but the Bank of England’s base rate (0.5 per cent) is higher than that of the European Central Bank’s. Not only that, but homeowners across Europe are also benefiting from historically low rates.

In France for example, you can borrow over 30 years at just 3.1 per cent. In Ireland, rates are hovering on or around 4 per cent, with Central Bank governor Patrick Honohan asserting before Christmas that the average rate being charged by Irish banks is 4.26 per cent – a full two percentage points higher than is being paid in other euro zone countries. This means that borrowing for a home is far more expensive than it should be, given the interest rate environment, and it's just another way in which Irish consumers are helping the banks get back on their feet – while they themselves struggle to stay standing.

Nonetheless, while maybe meagre pickings compared to our European counterparts, slashing a couple of basis points off your mortgage can still reap significant rewards given the scale of the borrowings and length of the term.

Away from the table for quite some time, banks are now looking to win low-risk customers by offering switching deals. Indeed, most of the better rates are now available only to new customers.

If you’re on a cheap tracker mortgage, these deals should be of no interest to you, as you won’t be able to do any better than your existing mortgage. If, however, you held firm to a variable rate mortgage, or you bought in recent years and are on a fixed rate which is north of 4 per cent, it may be time.

Before you talk to your bank, however, remember that if your fixed rate has some time to run, it’s unlikely to make sense to switch now. Banks typically impose “redemption penalties” if you break such an agreement, which can be hefty and may dilute or negate the benefits accrued from switching.

Switch and save

If you are in a position to switch, it can make financial sense to do so, and it seems that the appetite is there.

Before Christmas, Sean Couch of Dublin Mortgage Company ran a campaign targeting recent homebuyers, who are likely to be on high rates, and whose loan-to-value is likely to have fallen below 80 per cent thanks to recent property price rises. Of the letters he sent out, he got a 10 per cent response rate, which would be higher than your average mail drop.

Kevin McNerney, of First Rate Financial Planning, has also noted considerable interest from customers in switching their mortgage, and notes that people are achieving average savings of about €15,000-€20,000 over the life of the loan.

Consider the example of someone with €250,000 left on their mortgage over 24 years at a rate of 4.5 per cent. If they secured a rate reduction of just 0.3 per cent, they would save themselves €40 a month – or a significant €11,532 over the life of the mortgage.

If they secured a rate of 3.8 per cent, the savings would be even greater, at €92 a month, or €26,673 in total, if rates stayed the same.

The costs

Switching your mortgage isn’t free. Banks will typically require you to get a valuation of the property carried out ahead of switching and you can expect this to cost upwards of about €130+VAT. Generally this isn’t paid for by a bank.

Additional administration fees or costs associated with the deeds may also apply.

In addition, just like when you first bought the property, you’ll need legal advice to move your mortgage.

According to McNerney, you should be able to obtain this for about €1,000 but, like everything, fees will differ so ring around before making a decision.

If you look to remortgage via a broker, you might find that they have a deal with solicitors for the process or some sort of special offer.

Couch, for example, is offering a deal whereby he will cover any additional costs incurred in switching over and above the incentives offered by the banks (see below). This should make the process almost cost-free.

The offers

Homeowners have a wealth of options to choose from when it comes to switching. Bank of Ireland, for example, is promising to pay you back 1 per cent of your mortgage if you switch to the bank. So, for example, a €200,000 mortgage could put €2,000 back into your pocket, or €4,000 on a €400,000 mortgage.

Over at KBC Bank, you can get €1,000 towards your legal fees, as well as 50 per cent off home insurance in the first year, and at Permanent TSB you’ll also get €1,000 towards your legal fees, while EBS will pay these fees, provided that you use a solicitor from its panel.

Bear in mind that, with some banks, you’ll have to pay the legal fees upfront, with the €1,000 or so reimbursed thereafter.

And remember to read the small print. With BOI, for example, if you pay off your mortgage within five years of switching, the bank “reserves the right to seek the refund of the payment from the customer”, while PTSB’s offer is due to expire on March 31st and you’ll also need a current account with the bank.

Similarly at EBS, if you move your mortgage again within five years, you will have to pay EBS €777 to cover the initial legal fees for switching.

Who’s suitable?

Just like the banks are cherry-picking the best first-time buyers, so too are they when it comes to switching. So, if you were in good financial health at the time of getting your mortgage, but standards have since slipped with credit card debt and an overdraft building up due to home renovations, and maybe a couple of slipped payments to add to that, your chances of getting accepted by another bank may be slim.

This means that not everyone will be suitable to switch their mortgage provider. As McNerney points out, banks “still do the same assessment as on a new purchaser”, which means getting your six months of paychecks, bank statements and credit card bills etc ready for examination.

“They’re going to look at it the same as any application. So if someone got a mortgage a year ago, and have since gone overdrawn, they may not take it,” says Couch, noting that he has had some remortgage applications turned down.

“Missed payments would be a showstopper,” adds McNerney.

So the advice is, if you’re thinking about switching, first consider are you ready – and, if not, spend three months or so getting your credit card bill etc in order.

Another factor to bear in mind is the LTV (loan size to property value) of your mortgage.

Banks will typically only consider switching applications from those whose loan represents 80 per cent or less of the value of the property. While rising prices may have helped in this regard, it may still exclude some.

If you’re concerned about the new lending limits introduced by the Central Bank, don’t be. The regulator has already said that the LTV and LTI (loan to income) limits do not apply to switcher mortgages.

Before you switch, talk to your bank

If you’re worried about the effort involved in switching, consider talking to your own bank first. While typically the best rates are now only on offer for new customers, a phone call suggesting that you’re considering switching may reap rewards.

“It’s worth having a call. It saves someone the hassle of switching as banks may be more open to that at the moment,” says McNerney.

You may also have a case for a better rate if your LTV has decreased, thanks to the twin effect of rising prices and paying down your mortgage. However, read the small print first.

According to McNerney, your lender may have written into your contract of loan offer that the LTV was determined at the date when you drew down the mortgage – and it won’t be reviewed in the future. This means that, while you won’t be hit by a higher rate if house prices fall and your LTV shoots up, you will also be precluded from benefiting from lower rates by a falling LTV.

“It’s catching a lot of people out,” agrees Couch.

The risks

Just like any time you fix your mortgage or opt for a variable rate, switching mortgage providers brings the risk that your current provider might actually end up offering better rates than the provider you move to.

However, as Couch notes, “at least you’ll know for three-four years that this is what you’re going to be paying”.