Eithne Dunne – Money
Thousands can be shaved off your rates and the term reduced if you switch from one lender to another at the right time.
Some people switch mortgages to get the most favourable rate. Others are lured by cashback. And then there’s a slightly rarer breed: the serial switcher. These mortgage holders rapidly surf from one cashback deal to another — before settling down with the lowest rate on the market.
One poster on the Askaboutmoney forum says he has received about €28,500 in mortgage cashback (minus solicitors’ fees). This, he says, amounts to shaving seven years off his mortgage.
Having started with a mortgage from Bank of Ireland in April 2016, he jumped to EBS in September the following year. He moved back to Bank of Ireland in December 2018, switched to KBC in March this year and to Ulster Bank last month.
The reason for the gap between his first and second mortgages was that at that time you couldn’t switch within five years without losing your cashback. The Mortgage Credit Directive changed that. His plan was to eventually settle on the cheapest mortgage available: 2.3% fixed for two years.
With his two Bank of Ireland mortgages and his EBS mortgage, he got 2% cashback each time; with KBC, he got €3,000. With his current mortgage, he got €1,500 towards legal fees.
Instead of going to your employer with a form on three occasions, you go once with three forms.
His solicitor charged about €850-€900 each time, and he had to pay a breakage fee of €400 to Bank of Ireland on his most recent switch (none in any other case).
“People do this all the time with broadband and insurance,” he said.
“It takes time to gather payslips, photocopy, scan, email, but you won’t get that type of bonus at work for as little effort. On my first switch two years ago I had €380,000 of a mortgage with 34 years left, paying about €1,550 a month; now I have a 25-year mortgage of €350,000 and am paying €1,520 a month. That’s because I paid some off, and the interest rate is lower.”
Another poster on the same forum — an accountant — has pulled in about €20,000 (before legal fees). Having taken out a €250,000 mortgage with Bank of Ireland at a variable rate of 4.5% in 2013, she switched to EBS three years later. In 2017 she moved to AIB, and last year switched to KBC where she is on a one-year fixed rate of 2.5%. She intends to switch once more later this year — most likely to a four-year fixed rate of 2.6% with Ulster Bank.
Each time she received cashback she put it towards her mortgage. She didn’t incur any breakage fees, and while she paid €1,500 to her solicitor on her first mortgage, she negotiated a lower fee (about €1,000) for each subsequent switch. “By the time we move again, we will only have €150,000 left to pay so it won’t be as lucrative [to opt for cashback],” she said.
She had no trouble switching, even though on two occasions she was either on a temporary contract or probation at work. “When we switched to AIB, we were only there for six months, but no one batted an eyelid. That might change if more people do this.”
How much cashback can I get?
EBS offers 2% cashback up front to both first-time buyers and switchers; stick around for five years and they’ll give you another 1%. Bank of Ireland will give you 2% whether you’re a first-timer or a switcher; if you also have a current account it will give you another 1% after five years.
PTSB will give you 2% cashback whether you are a first-timer or a switcher. If you have an Explore current account — this won’t be of interest to serial switchers — you’ll get 2% cashback each month on repayments from this account up until 2027.
Neither AIB nor KBC do cashback for first-time buyers, but they give €2,000 or €3,000 respectively to switchers. Ulster Bank is giving €1,500 to first-time buyers and switchers. For anyone taking out a small mortgage, these fixed sum may be more attractive than a percentage-based deal.
“KBC offers €3,000 cashback to switchers; for someone with a €75,000 mortgage, this is 4% cashback,” said Joey Sheahan, head of credit at MyMortgages.ie. He said that every mortgage holder should review their mortgage every three to four years, regardless of whether they are interested in cashback.
But what interest will I pay?
Predictably, the banks offering the best cashback incentives for the typical mortgage (Bank of Ireland, EBS and PTSB) also have the highest rates. A first-time buyer with a loan-to-value ratio of 90% can opt for variable rates ranging from 3.15% (AIB, Haven and Finance Ireland) all the way up to 4.5% (Bank of Ireland).
With fixed rates, the best deal is Ulster Bank’s 2.3% two-year fixed rate, although the same bank also offers a decent four-year fixed rate (2.6%). Meanwhile, KBC has a one-year fixed rate of 2.5%. After that, rates increase up to Bank of Ireland’s 2.9% one or two-year fixed offering.
This general correlation between the size of the cashback and the size of the interest rate led to warnings from consumer bodies such as the Competition and Consumer Protection Commission for consumers to weigh up the cost of a mortgage over its lifetime before opting for cashback offers.
And even if you intend to pocket the cashback and switch quickly to a good rate, inertia may creep in and you may stay put. Research from the Department of Economics at Trinity College Dublin last year reported that the average cashback mortgage is €32,000 more expensive over 30 years.
Diarmuid Kelly, chief executive of Brokers Ireland, said cashback should never be the sole focus in switching mortgage. He gives an example of a €250,000 mortgage with a 20-year term on a 4.5% rate.
“This would cost the consumer €1,581.62 per month. Switching to another lender over the same period on a 3.5% rate would mean repayments of €1,449.90 per month. Over the life of the mortgage it would save €31,612.80. Take the same mortgage with a 2% cashback rate, the consumer would initially be €5,000 better off. It doesn’t deliver value over the longer term.”
Costs and rules of switching
Whether you switch once or a handful of times, there are associated costs; hopefully the cashback and/or better rate should more than offset them.
Breakage fees for those leaving a fixed-rate mortgage early were once very expensive; they are no longer as high due to a change in how they are calculated. But they still exist, so check with your bank as to what penalty you’d have to pay to leave your fixed rate early. In some cases it will be little or nothing; in others it may be considerable.
“When a fixed rate period applies to a loan, the bank may suffer a loss if the customer changes to a new rate during the fixed rate period,” said Brian Vaughan, head of mortgages at Bank of Ireland. “If we suffer such a loss we may ask the customer to pay compensation for this.”
Michael Dowling, managing director of Dowling Financial, said the amount you’ll pay depends on the rate you are on, and at what stage you break.
“The penalty will be greater if you break a five-year fixed rate in year one as opposed to year four.”
Legal fees vary, but a reasonable budget would be €1,500; if you switch repeatedly negotiate a lower rate. There will also be a property valuation fee (typically €130-€150) each time.
There is a bit of a grey area when it comes to mortgages secured via a broker. That’s because brokers generally get commission from the bank, which may try to claw this back if you jump ship within a certain period.
“Mortgage brokers generally operate on a three-year clawback basis,” said Kelly. “This means any commission reclaimed by the banks could be passed onto the consumer if the mortgage is moved within that term.”
Source: The Times (Ireland) 5 May 2019
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