Five steps to getting a cheaper mortgage amid lender price war
You could easily save tens of thousands by moving to a cheaper mortgage, writes Louise McBride
The mortgage price war which kicked off in the summer has continued into the autumn - making it easier for homeowners and first-time buyers to get a better deal on their mortgage. Permanent TSB, Ulster Bank and KBC Bank are among the latest lenders to cut some of their rates. More are expected to follow suit. Homeowners and house hunters should take full advantage of this price war to secure the cheapest mortgage possible. Here's how to.
get off your standard variable rate
You could save tens of thousands, perhaps hundreds of thousands, in mortgage interest by switching from a standard variable rate (SVR) mortgage to a cheaper home loan offered by your, or another, lender. The saving will depend on the size of your loan, the percentage of the value of your home on which you are borrowing, and how expensive your current lender is.
SVR mortgages are usually not offered to new borrowers today, but if you've had your mortgage for a few years or more and you have never changed your interest rate, you could well be on a SVR. The most expensive SVRs are the 4.5pc rate charged by Bank of Ireland and Permanent TSB. Paying interest at that rate will see you pay tens of thousands more for your mortgage than you need to.
Let's say, for example, you have €300,000 left to repay on your mortgage over the next 20 years, you're on an SVR of 4.5pc, and your home is worth €500,000. You'd save almost €70,000 in mortgage interest over the next 20 years by switching to the cheapest variable mortgage offered by ICS Mortgages for such a borrower, and almost €58,000 by switching to AIB, Haven or Finance Ireland. You may not even have to change lender to get a cheaper mortgage.
Get the best variable rate you're due
Even if you're not on a SVR, the interest on your mortgage could still be high.
You could be paying a variable rate of around 4pc or more on your mortgage, even though you're eligible for a rate of around 3pc or lower.
So if you've a variable mortgage, make sure you're on the cheapest rate you are eligible for. Any recent uplift in the value of your home could mean you're in line for a much cheaper mortgage.
All banks offer cheaper mortgages - known as LTV (loan-to-value) mortgages - to people who are borrowing less than 80pc or 90pc of the value of their home. The LTV is the percentage of the property price borrowed and cheaper interest rates are usually available to those with low LTVs.
So whether you're trading up - or you simply want to make your existing mortgage cheaper - ask your bank if it can offer you a cheaper interest rate, compare that rate to what you can get elsewhere, and if you're not happy with your existing bank's offer, move to a cheaper lender.
Most banks offer switching incentives which cover the costs of you moving your mortgage to them, but be sure to check this before you move.
First-time buyers who want a variable mortgage should make sure to get the cheapest rate they can. Be aware that a reduction in a lender's interest rate doesn't necessarily make its mortgages the cheapest on the market. To find the cheapest loan, always compare the cost of a mortgage with various lenders. You can do this easily on the price comparison website, bonkers.ie or by getting advice from a mortgage broker.
Make a call on fixing your mortgage
It may work out cheaper to fix your mortgage, where your interest rate is set for a number of years, than to opt for a variable rate, where your interest rate fluctuates. "A lot of the variable rates are dearer than fixed rates," said Michael Dowling, managing director of the Dublin mortgage brokers Dowling Financial.
A first-time buyer borrowing 90pc of the value of their home, for example, could get a five-year fixed rate of 2.6pc from Ulster Bank or a fixed rate of 2.8pc from KBC, ICS Mortgages or Finance Ireland. The cheapest variable rate available for such a borrower is 3.15pc.
The danger of locking into a fixed rate today is that a much cheaper fixed or variable rate might become available over the next year or two. It's best to be in a fixed rate when interest rates are increasing or are likely to do so. It's best to be in a variable rate when interest rates are falling. So when deciding whether to get a fixed or variable mortgage, you need to make a call on the direction interest rates are likely to take in the future.
Many economists expect the ECB's main refinancing rate - which is now at zero - to continue near, or at, this record low for some time. Any increase in this rate is likely to push up the cost of variable mortgages; any decrease could see the cost of variable mortgages fall.
Independent economist Alan McQuaid believes an increase in the refinancing rate is "years away". "Ten years from now I wouldn't be at all surprised to see eurozone rates much the same as they are now," said McQuaid. "Japan first pushed rates to zero in February 1999 and 20 years on things are little changed."
Austin Hughes, chief economist of KBC Bank, believes the low interest rate environment will continue "for at least the next four or five years".
Both Hughes and McQuaid expect the ECB refinancing rate to be at zero in 2020, 2021 and 2022. Both also believe it unlikely the refinancing rate will be cut further. "Unless we see extraordinary economic weakness in the euro area, we seem to have reached the low point [of the ECB's main refinancing rate]," said Hughes.
So even if the refinancing rate stays at its record low of zero, if it isn't cut further, the variable rates on offer from the banks may not fall much lower either, so it may make sense to fix your mortgage.
"I don't believe variable rates will fall lower than fixed rates at the moment," said Dowling. "It is likely that the main refinancing rate will fall by 0.1pc. The only people who will immediately benefit from that will be those on tracker mortgages. I'd recommend that anyone borrowing [to buy a home] looks at a fixed rate rather than variable."
Get a State-backed mortgage
The Goverment-backed Rebuilding Ireland Home Loan (RIHL) is aimed at first-time buyers who earn too much to qualify for social housing but too little to get a sufficient mortgage from a bank to buy their own home. Should you qualify for a RIHL, it is much cheaper than the mortgages available from the banks. The interest rate charged on the RIHL is a fixed rate of either 2pc or 2.25pc. A 30-year mortgage of €250,000 would work out about €45,000 cheaper in mortgage interest under the RIHL than the cheapest variable mortgage available from AIB for those borrowing more than 80pc of the value of their home.
One of the drawbacks of the RIHL is that you cannot usually shop around for mortgage protection insurance, which repays your mortgage should you die.
Time it right
The larger the mortgage, the more of a financial burden it is. So buying a property when prices are low is one of the best ways to keep the cost of your mortgage down. As some economists expect Irish house prices to fall over the next couple of years, it might be worth a prospective buyer's while to sit on the fence and see if houses become more affordable in the coming months.
"I expect house prices, as measured by the CSO, to fall on average next year by between 0pc and 5pc, with the biggest drop coming in Dublin," said McQuaid. "A combination of new supply, a slowing economy and geopolitical uncertainty (including Brexit) will be the main factors behind this."
There could be double-digit falls in house prices under a hard Brexit, according to McQuaid. "In the event of a soft Brexit, house prices will be more stable, though I still think new supply and a weaker world economy generally will push prices lower," he said. McQuaid expects house prices to fall by between 5pc and 10pc in 2021.
Hughes however expects house prices to increase by around 2pc or 3pc on average next year "on the assumption of a soft - but not smooth - Brexit". "I think the economic damage [of a hard Brexit] would inevitably weaken the property market," said Hughes.
There is already some evidence that Brexit concerns are having an impact on Irish house prices. So a house hunter with time on their side might well be advised to sit tight - and to move quickly when the price is right.