Looking for better value on mortgage loan as higher monthly payments loom

Q&A: Either you have a damaged credit rating and are with a sub-prime lender or you have lost out badly on better value

I have just received a letter saying my mortgage interest rate will be increased to 5.75 per cent from 4.5 per cent.

We have paid at the 4.5 per cent rate since about 2008 or so. At that time an alternative arrangement was made and we have since moved everything back into the one account.

I phoned last year asking if I could avail of a lower interest rate and was told no. I am wondering if there is anything I can or should do?

Mr J.M.

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There is very little detail here but it seems clear to me that you should have moved your mortgage some time ago. And, at the rates you are quoting, that still seems like the obvious choice to me. I am also concerned about the reaction to your request last year.

I obviously don’t know what the loan to value is, and will assume the mortgage — and your credit rating generally — is in good standing. Your reference to an “alternative arrangement” raises more questions than it answers and it may be that there was some restructuring which would change the position but I’ll stick for now with my assumptions.

I’m also unsure what type of mortgage product you have. At first sight, it would appear to be a tracker mortgage. The only clue is that your mortgage provider has told you it is jacking up the mortgage interest rate by 1.25 percentage points. This is the amount by which the European Central Bank has raised its interest rates in two steps at meetings in July and earlier this month. Tracker mortgages, because they track the ECB rate, automatically increase (or fall) at the same pace as the ECB raises or cuts its interest rate.

To the best of my knowledge, Irish lenders have not yet increased their variable mortgage rates in the wake of the ECB action, though all are expected to do so to some degree over the coming weeks — not least as ECB rates will likely rise again in October.

And if you were on a fixed mortgage rate, well it would have been fixed and your lender could not be increasing it arbitrarily midterm. For those whose fixed rates have come to an end just as the ECB rates are rising, it is unfortunate but, again, there are plenty of fixed rates out there well below what you are being charged.

But it is still puzzling. Back in 2008, ECB rates were falling but from a high of 4.25 per cent. Over the course of that year, they fell to 3.75 per cent, 3.25 per cent and, by December to 2.5 per cent as the ECB reacted to the financial crash At the same time, Irish banks had realised that tracker mortgages were costing them money. Where they were still offering them at all, the tracker margin — the amount charged over the prevailing ECB rate was rising.

The key thing is that any tracker mortgage of 4.5 per cent back in 2008 — credibly between 0.75 and 2 percentage points above the ECB rate, assuming it was taken out later in the year — should have been falling over the years since then in line with falling ECB rates which gradually declined to zero in 2016 and stayed there until July of this year.

If a tracker, your mortgage interest should have fallen to somewhere between 0.75 per cent and 2 per cent over the past six years, so something is not right.

So the first thing you need to do, if you don’t know already, is find out what type of mortgage you have. Then you need to move it.

If it is a tracker, something is wrong and you may have a case against the lender which should be reported to the Central Bank. My only reservation is that, given the huge focus on the tracker mortgage scandal over the past seven years, I cannot believe any lender would be so daft as to still be scamming customers on tracker rates.

If it is anything else, the rate you are on is massively uncompetitive, never mind the rate to which your lender has announced they will now charge you going forward. You should have moved years ago and staying with your current lender at this rate has cost you a lot of money.

I’ll assume for the moment that you still have 70 per cent of your mortgage outstanding even after 13 years. It is unlikely but given some of the crazy 100+ per cent mortgage they were giving out back then and depending on the term of your loan and any hiccups during Covid etc when some loans were frozen, it is possible I guess. In any case, it means we are looking at the more expensive mortgage rates available.

According to bonkers.ie, ICS Mortgages is offering the best variable rate at just 2.7 per cent on a mortgage where the loan balance is up to or equal to 80 per cent of the value of the property. At the other end of the scale, Bank of Ireland has the most expensive offering, at 4.2 per cent but it is an outlier — almost three-quarters of a percentage point more expensive than the best rate from any other provider, which is effectively Bank of Ireland saying it has no interest in offering variable rate loans.

Turning to fixed rates, ironically Bank of Ireland is currently the most competitive — offering a four-year fix at just 1.9 per cent for those who can qualify for its “green” loan rate, according to bonkers.ie, with four-year rates climbing to around 2.15 per cent. These rates will be rising.

Either way — and depending on the amount of your mortgage loan — this could be costing you thousands of euro every year.

I should note that interest rate information on the website of the Competition and Consumer Protection Commission (CCPC) points to higher current interest rates, which shows the difficulty in obtaining accurate information on these things but, regardless, it is clear that there is considerably better value out there than you are paying, to say nothing of the new higher mortgage rate looming for you.

Even the CCPC site shows 10-year fixed rates on offer at between 2.85 per cent and 3.75 per cent, which should just how uncompetitive your 4.5 per cent figure — soon moving to 5.75 per cent — really is.

So should you switch? Yes, absolutely, unless you are with a sub-prime lender or have a less-than-perfect credit rating, in which case finding a new lender to take you on could be problematic.

And if you specifically asked a year ago, as you say, whether there was a lower rate available, unless you were locked into a fixed rate or with a sub-prime lender because of a poor credit rating, the answer should have been a resounding yes. Again, depending on your circumstances and the precise nature of this conversation a year ago, it is possible that you have grounds for complaint.

For those with sub-prime lenders, you are not automatically locked in. If you have managed to keep up to date with all loan repayments for a period of years, you should now be able to avail of lower interest rates by switching.

Finally, does it cost? Yes, there will be some modest legal fees and the cost of a property valuation but these will be more than offset if you can move from your current rate to one of the more competitive rates available on the market.

  • Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice