Q I am a teacher with a salary of €47,000. My husband, who works in tech in the private sector, earns €50,000 a year and can earn an annual bonus of up to 20pc of his salary, but it’s not guaranteed. Even though we are paying rent, we manage to save €2,000 per month and have saved a deposit of €60,000. We have a car loan that costs €400 per month. We clear our credit cards and overdrafts monthly. We spotted a house in Crumlin for €435,000. Can we borrow enough?
A Joey Sheahan, head of credit at MyMortgages.ie and author of The Mortgage Coach, says you could easily carry the €400 monthly loan repayment. If you are currently renting and can afford to buy now, then it’s probably a good time because rents are so high and your mortgage repayments will, most likely, be lower than the rental payments.
Characterised by sometimes unloved properties at knockdown prices, auctions can appear to be dominated by investors and cash buyers looking for an asset, not a home. A well-organised first-time buyer who can act fast and hold their nerve could get lucky, but there are challenges.
What’s the story
Properties listed for online auction sometimes have a back story. An online auction brings a quick sale and there is usually a good reason the vendor needs it. It could be that they, or their bank, need to cash out quickly. If there is an issue with rising damp, a sitting tenant or a niggle with the title, online auctions can attract more seasoned cash buyers with the experience and the resources to sort things out.
New figures from the Banking and Payments Federation Ireland (BPFI) show that a total of 5,033 mortgages, worth almost €1.3 billion, were approved in July – the most in any month since BPFI began collecting data in 2011.
On an annualised basis, 53,511 mortgage were approved in the twelve months ending July 2021, valued at €13.1 billion. This is up 3.15 per cent compared with the twelve months ending June 2021 and an increase in value terms by 3.72 per cent over the same period.
While the figures suggest an impressive recovery from the Covid-19 pandemic for the housing sector, if we dig deeper into the numbers, the bounce back may not be as strong as it initially seems.
Breaking down the numbers
Of the 5,033 mortgages which were approved last month, first-time buyers (FTBs) were approved for 2,766 mortgages (55 per cent of total volume) while mover purchasers accounted for 1,272 (25.3 per cent).
It represented a 3.3 per cent decrease in approval volumes compared to June, but when compared to last July, approval volumes were up by 48.2 per cent.
In total, mortgages approved in July 2021 were valued at €1.2 billion – of which FTBs accounted for €707 million (55.1 per cent) and mover purchasers for €382 million (29.7 per cent). The value of mortgage approvals rose by 0.6 per cent month-on-month and by 58.3 per cent year-on-year.
What is a mortgage approval?
A mortgage approval is defined as a “firm offer” to a customer of a credit facility secured on a specific residential property.
A mortgage approval arises when the lender issues a formal offer of mortgage finance to the customer (whether it be in print or some other durable form) for a specific residential property which contains the Notice of important information to be included in a housing loan agreement specified in the Consumer Credit Act 1995.
All mortgage loans must be secured on residential property in Ireland.
Speaking on the latest figures, Brian Hayes, Chief Executive, BPFI said: “The latest mortgage approvals for July show continued growth, especially for FTB mortgages. In total almost €1.3 billion in mortgages were approved, the most in any month since BPFI began collecting this data in 2011.”
“Looking at the annualised figures which allows us to more accurately assess emerging key trends, there were 53,511 mortgage approvals in the twelve months ending July 2021, valued at almost €13.2 billion – again, the highest level since the data series began.
“The value of approvals more than doubled since the twelve months ending October 2016, driven by growth in lending to FTBs and re-mortgages or switching.”
“These are significant figures and very much signal a robust pipeline for drawdown activity later in the year.”
Figures may not paint an full picture of the property market
While Hayes claims these figures show continued growth in the housing market, there are a number of factors we must consider while analysing them in order to get a complete picture.
As pointed out by Joey Sheahan, Head of Credit with MyMortgages.ie, 2020 was a tumultuous year for the housing sector, as activity in the market was very low as a result of the initial lockdown.
“Year on year comparisons on mortgage approval figures aren’t currently the most telling as the market has been an absolute roller-coaster during Covid,” Sheahan said.
“While the overall market is booming, we are seeing a lot of borrowers renewing their mortgage approvals as their previous approvals didn’t give them sufficient time to view and enter into an agreement on a house.
“Others were unable to progress previous approval due to being on the Employment Wage Subsidy Scheme (EWSS).
“These issues were particularly challenging during lockdown in the first four months of the year so the mortgage drawdown figures could be artificially high.”
The figures in context
While the figures suggest things are improving significantly in the housing sector, it is important to remember that the mortgage market was still relatively depressed in July of last year owing to uncertainty around the trajectory of the pandemic which impacted the property market generally.
Figures released by the Central Statistics Office earlier this month show the property market continues to be stoked by pandemic-related factors, such as increased savings and lower-than-anticipated supply.
Transaction prices in June 2021 were 6.9 per cent higher -than they were in the same month last year and the spread of price increases was countrywide.
Ireland once again has the most expensive new mortgage rates in the Eurozone.
Rates in July were more than double the average for the rest of the 19 countries sharing the euro, according to new figures from the Central Bank.
It said that the average new mortgage rate in Ireland in July was 2.73 per cent, down 5 basis points on the same month last year. The average for the Eurozone was 1.28 per cent, although the financial regulator noted the rate varied considerably across countries.
Ireland is back to having the highest mortgage interest rates in the Eurozone, having trailed only Greece’s high homeloan repayment rates in recent months.
Despite topping the Eurozone mortgage rates league, Ireland’s rate is down 0.09 per cent compared to last year, and at its lowest level since at least August 2017.
Greece (2.58 per cent) and Latvia (2.54 per cent) have the next highest Eurozone mortgage rates to Ireland, while Portugal (0.8 per cent) and Finland (0.71 per cent) charge the lowest mortgage rates.
The weighted average interest rate on new fixed rate mortgage agreements in Ireland was 2.62 per cent in July, a decrease of 5 basis points on July 2020. Fixed rate mortgages accounted for 83 per cent of new agreements over the month.
For new variable rate mortgage agreements, the average interest rate stood at 3.29 per cent in July, a decrease of 15 basis points on July 2020.
The volume of new mortgage agreements amounted to €718 million in July, a 29 per cent increase on the same month last year, when volumes had declined significantly following the onset of Covid-19. It also represented a 5 per cent increase compared with June 2021.
Joey Sheahan, Head of Credit with MyMortgages.ie, said that the increase in the volume of new mortgage agreements in July “reflects buyers ‘catching up’ on purchases they would otherwise have made last year. The volume in August 2020 was just €468 million so we could easily see August 2021 being up 50 per cent+ higher on this number.”
Sheahan continued: “House prices continue to increase and while the Government has put plans in place to deal with the under supply, many people appear to believe that prices may keep rising and they are therefore better off buying now.”
Meanwhile, renegotiated mortgages amounted to €324 million in July, an increase of 29 per cent on the previous year. The high volume of renegotiated mortgages in July is driven by a large volume of expiring fixed-term contracts.
Breaking down the numbers
To put the figures into perspective, according to the Banking & Payments Federation Ireland (BPFI), the average first-time buyer mortgage is now around €250,000.
This means a typical first-time buyer who’s borrowing that amount over 30 years will pay almost €181 a month more for their mortgage compared to the Eurozone average, or almost €2,200 a year.
Why are Ireland’s mortgage rates so high?
One of the reasons why Irish homeowners are paying more than others in the Eurozone is due to a lack of competition in the Irish mortgage market.
The market remains heavily concentrated in the hands of a few main banks, with Allied Irish Banks, Bank of Ireland and Permanent TSB holding around 70 per cent of the mortgage market between them.
More competition would help bring down rates, but there’s anecdotal evidence that some foreign lenders are being put off entering Ireland due to the riskier nature of lending here.
Another reason concerns home repossession and the inability of banks to take back a property if the loan has gone bad.
In some European countries a bank will take back ownership of a property within the space of a year or so if the loan isn’t being repaid.
This isn’t the case in Ireland where the number of repossessions, even in cases where the mortgage has been in arrears for years, remains negligible due to the length and complexity of the process and the legal and political impediments faced by banks.
A third reason is that many Irish banks, unlike most other banks in European countries, offer cashback offers, with Permanent TSB offering 2 per cent, EBS and Bank of Ireland offering up to 3 per cent cashback, while Ulster Bank will offer €1,500 towards your legal fees.
If we factor in the cashback costs as well as the extra fee income many European banks generate through set-up and admin fees, Irish mortgage rates, although still high, are closer to the Eurozone average.
The average price paid for a home in Ireland rose to €310,641 in the year to July, the latest figures from the Central Statistics Office (CSO) show.
Residential property prices increased by 8.6% nationally over the previous 12 months, compared to growth of 0.7% in the 12 months prior to last July and up from 6.9% in June.
In Dublin, house prices rose 8.1% year-on-year to a mean average of €479,454, rising to €649,916 in Dun Laoghaire-Rathdown, with prices up 9.1% outside the capital, most expensive in Wicklow €412,396.
‘In the period before COVID-19, the annual growth in residential property prices fell gradually from 13.4% in April 2018 to 0.9% in March 2020,’ CSO statistician Viacheslav Voronovich said.
‘While price growth remained subdued throughout most of 2020, a trend of accelerating growth emerged in the latter part of the year and into 2021.’
House prices nationally are still 10.7% lower than their 2007 peak, with the Dublin market 16.5% off highs posted in February 2007 and the rest of Ireland 13.1% below the May 2007 record.
Since early 2013, house prices nationally have nearly doubled (+99%), rising 106.8% in Dublin from their February 2012 low and 100% in the rest of Ireland since May 2013.
The volume of property transaction in July rose 49.2% year-on-year and 10% month-on-month, with 3,822 purchases filed with the Revenue in July compared to 2,561 the same month last year and 3,473 in June.
The total value of transaction finalised in July was €1.3 billion, with existing dwellings (3,221) accounting for 84.3% of purchases and new homes (601) representing just 15.7%.
First-time buyers made up just under a third (32.3%) of purchasers in July, and MyMortgages.ie head of credit Joey Sheahan said ‘their share of the market will continue to grow’ if the Help-to-Buy Scheme is extended in next month’s Budget.
He added that rising transaction numbers were ‘hopefully’ a sign of greater construction output.
Brokers Ireland director of financial services Rachel McGovern said that double digit growth in some area was ‘unhealthy for potential buyers and the economy at large’.
‘With the exception of the release valve presented by new blended working arrangements that would appear to have increased the appeal of areas like the South-East and the Midlands, which are seeing an 11% increase in prices, home ownership in the most populous areas of Dublin and its environs has largely become the preserve of those on higher incomes or those with strong financial support from family,’ she said.
House price growth has risen to a three year high with an 8.6% climb up to July, it has been revealed.
Prices in Dublin rose by 8.1% while prices outside it grew by 9.1%, new figures from the Central Statistics Office have shown.
In July 2021, 3,822 dwelling purchases by households at market prices were filed with Revenue, an increase of 49.2% compared to the same month last year.
The median price of a dwelling purchased in the 12 months to July 2021 was €267,000.
Viacheslav Voronovich, Statistician, said: “In the period before COVID-19, the annual growth in residential property prices fell gradually from 13.4% in April 2018 to 0.9% in March 2020. While price growth remained subdued throughout most of 2020, a trend of accelerating growth emerged in the latter part of the year and into 2021.
“Since the latter part of 2020, the number of dwellings purchased by households have returned to pre-Covid-19 levels.
“In the first seven months of 2021, there were 24,280 dwellings purchased by households at market prices. This compares to 24,416 for the first seven months of pre-pandemic 2019.”
Joey Sheahan, Head of Credit at MyMortgages.ie, added: “First Time Buyers make up a strong cohort of buyers as always, but we would expect that if the Help-to-Buy Scheme is extended in the upcoming budget, as expected, their share of the market will continue to grow.
“The percentage of new dwellings transacted over the period has also increased which hopefully is a sign of greater construction output in a market where the delivery new homes is absolutely crucial.”
ICS Mortgages is reducing interest rates across its new residential variable and fixed-rate mortgages.
The lender said it will cut rates by up to 0.5% from next Monday 9 August.
Fixed interest rates will start from 1.95%, while variable interest rates will start from 2.45%.
Under these new rates, ICS said a typical first-time buyer taking out a 30-year mortgage of €250,000 could save more than €18,000 over the lifetime of their mortgage, when compared to the rates offered by one of the largest providers in the market.
That estimated saving is based on a €250,000 loan over 30 years, fixed for three years, with a Loan to Value of 90%, assessed against a similar mortgage offered by the one of the largest providers in the market, with a three year fixed rate of 2.55%.
“Buying a house is the single biggest financial decision most people will make in their lifetime. In recent years, however, Irish homebuyers have been offered a shrinking pool of options for how they fund such an essential purchase,” said Ray McMahon, Chief Commercial Officer at ICS Mortgages.
Mr McMahon said that favourable international financial market conditions allow them to now offer new residential customers reduced repayments.
Daragh Cassidy of price comparison website, bonkers.ie welcomed today’s news from ICS Mortgages.
“Strong competition is needed now more than ever as PTSB, AIB and BOI could end up with well over 80% of the mortgage market if the loan sales associated with Ulster Bank and KBC’s exits go through,” he said.
Mr Cassidy said ICS Mortgages is now only the second lender in Ireland, after Avant Money to offer a rate below 2%.
However, he said we shouldn’t lose sight of the fact that Ireland has among the highest mortgage rates in the Eurozone.
“The average rate on a new mortgage here is currently 2.80%, which is over double the currency bloc’s average of 1.27%,” he pointed out.
However Mr Cassidy said recent rate reductions from the non-bank lenders in particular, such as Finance Ireland, Avant Money and now ICS mean rates slightly closer to European levels are finally becoming more widely available.
“Avant Money, Finance Ireland and even ICS may not be familiar names to many mortgage seekers, who may be tempted to go to more well-known lenders such as AIB and BOI as their first port-of-call.
“However recent developments clearly show that it is the smaller, newer lenders who are offering some of the best value right now,” he said.
Meanwhile, Joey Sheahan, Head of Credit with MyMortgages.ie said the mortgage market has grown increasingly competitive both for first time buyers and those looking to switch mortgage or trade up.
“We predict a huge upswing in existing homeowners looking to switch to reduce their monthly payments on their variable rate mortgage, or to secure long-term cost certainty with one of the new fixed rate offers,” he said.
Mr Sheahan said a borrower could save €56,000 in interest by reducing rate from 2.95% to 1.95%.
He said that would be based on a €300,000 loan at 60% loan to value over 30 years.
Housebuyers are paying an average of 7% more for a new home than they would have a year ago, with experts warning prices are only going to keep rising as long as the enormous gap between supply and demand remains.
The prices of homes have almost doubled since their recession-era low in 2013. While there was no increase in the year to June 2020, over the past year they have surged again — rising by between 6.9% and 6.4% in Dublin, and 7.4% across the rest of the country — according to the Central Statistics Office.
The figures are based on the sums people are actually paying, and not on asking price.
The biggest surges have occurred in the Mid-West (up 8.7%) and the South-East (8.6%), though in the South-West, they are only up 2.7%.
In Dublin, residential property prices have risen 103.7% from their February 2012 low, while residential property prices in the rest of the country are now 95.8% higher than their trough, which was in May 2013.
Experts have warned that the picture will remain bleak for would-be homebuyers without substantial government intervention and a huge increase in the completion of new homes.
The Institute of Professional Auctioneers & Valuers (IPAV) said the rising prices of recent months highlighted by the CSO figures are likely to continue for the foreseeable future.
According to Pat Davitt, IPAV chief executive, the divergence between supply and demand is enormous and is unlikely to change in any meaningful way in the near future.
“Supply is so tight that in some cases would-be sellers are not putting their homes on the market, lest they may not be able to find a suitable property to buy or that by the time they do prices may have moved beyond their budgets,” Mr Davitt said:
We’re back in an upward trajectory in all areas of the country. And anyone who is concerned with the wellbeing of society as a whole would not want to see this continue at this level for long.
Mr Davitt said that those on average incomes are unable to afford to buy a home in many areas. And for those who can afford it, a huge amount of the money they borrow and pay interest rates on for the lifetime of their mortgages goes back to the Government in taxes and levies.
“The new Government plan must tackle the supply issue in an unprecedented way,” he said, adding that the solutions must involve State investment as recently recommended by the ESRI as well as local authority utility investment and a review of the tax take on housing.
Joey Sheahan, head of credit at MyMortgages.ie, said: “It seems, from these CSO reports, that property prices are really only going one way for the foreseeable future and that’s up. This will continue as long as demand for properties outstrips supply.
“While construction has picked up, material supply issues and staffing shortages are hampering the delivery of much-needed homes,” he added.
Trevor Grant, chairperson of the Association of Irish Mortgage Advisors (AIMA), said the figures reflect months of construction delays caused by the pandemic.
“With most sites back up and running, we would hope to see an increased supply of new homes coming on stream later this year,” said Mr Grant:
That said, there are still too many developments caught in planning limbo and that is something that requires urgent action by Government.
Despite the rising cost of buying a home, Mr Sheahan argued that the high cost of renting means it is not necessarily a bad time to consider entering the property market.
“Rents continue to financially cripple those in rental accommodation, so, in a vast number of cases, the cost of repayments on a mortgage is going to be smaller than what people are shelling out on rent,” Mr Sheahan said.
He said the situation is much different now than the one that led to the property crash over a decade ago, with prices rising more slowly and more stringent lending rules in place.
With Irish people reported to have saved more than €13b during the pandemic, while adapting to remote working and achieving a better work/life balance, many are now looking to take control of what happens next as they consider their future.
The pandemic triggered a lot of new perspectives for Irish people, not least around lifestyle, family well-being and the home. Remote working became a catalyst for change as the daily commute disappeared and people have had more time to look around at their homes and how it meets their family needs. The appetite for building, extending and trading up and even away from urban locations to more space, amenities or proximity to the family network is growing. Here we look at what’s involved in trading up, and if it’s the right time to move to a property more suited to your needs? Before you take that step onto the next rung of the property ladder Joey Sheahan, Head of Credit at MyMortgages.ie and author of The Mortgage Coach recommends some key steps as you plan your next move:
Hold onto your cash
If you are thinking about trading up, it’s wise to keep your powder dry, i.e. hold onto your cash reserves. Lenders want to see that you have 6 months of savings to cover your mortgage repayments in the event of unexpected expenses and in order to avoid early default. Just to be clear, cash or liquid assets include balances in current and savings accounts and investments such as stocks, shares or cryptocurrency. There are a few actions you can take to free up cash, if required, so you have the requisite cash reserves:
– Stop overpaying your mortgage now. If you’ve been paying extra every month or on an ad-hoc basis to reduce the term of your mortgage, bring your repayments back to the terms of the mortgage agreement. Use that extra cash to build up your savings.
– Don’t use cash reserves to make any sizeable purchases. If you absolutely need to
change your car, for example, take out the maximum loan over the longest period
and at the lowest interest rate instead.
– Delay making any unnecessary purchases using cash or credit until after the
mortgage process has been finalised.
You’ve prepared the groundwork: reduced your outgoings, built up your savings, but you’re still struggling to come up with the 20% deposit required as you are a non-first-time buyer. An example can help show the way.
Mark and Aisling plan to sell their two-bedroom apartment for €300,000 and buy a four-bedroom house for €400,000. Because they are second time buyers, they are limited to a loan amount of €320,000 (i.e. 80% LTV). They had €50,000 cash savings. However, they need to sell their existing apartment to fund the balance of the deposit. Their loan on the apartment is c.€200,000 so they should net c.€90,000 after selling expenses such as auctioneers and legal fees have been deducted. This process of selling one property and purchasing another simultaneously can be challenging so some people will firstly sell their existing property so that they have cash in the bank. Then, either move in with family or rent a property so that they are a stronger buyer for the house that they wish to trade up to and are not dependent on the sale of their existing property.
Central Bank Rules for Second-Time Buyers
In February 2015, the Central Bank introduced a range of measures for mortgages aimed at maintaining financial stability and protecting consumers. The measures set limits on the size of mortgages that consumers can borrow based on loan-to-value (LTV) and loan-to-income (LTI). Under LTI rules, a limit of 3.5 times gross income applies to all borrowers. First-time buyers can borrow up to 90% of property value. Second-time and subsequent buyers can borrow 80% of the property value only, which of course also applies to people looking to trade up.
If you’ve explored all avenues and still can’t come up with the 20% deposit, you may be able to avail of an exemption. There are two types of exemptions available, but lenders may grant an exemption under the loan to value rule or the loan to income rule, but not both.
I’ve found that most of the applications for exemptions to the Central Bank rules are from second-time buyers.
Loan to Value
Lenders can apply exemptions up to 20% of the total value of home loans that they grant to second and subsequent buyers. This means that it’s possible for second-time buyers to borrow up to 90% of the purchase price, reducing the deposit required to 10%. Under current rules, someone trading up to a house with a purchase price of €350,000 would require a deposit of €70,000, but just €35,000 if they got the exemption that meant the LTV increased to 90 per cent.
Loan to Income
Under loan-to-income exemptions, lenders can circumvent the 3.5 times gross income rule in 10% of second-time cases. It is possible to get the gross income multiple increased to four or even 5 times an applicant’s combined annual gross income (i.e. before tax).
Being granted an exemption of this kind can make a significant difference to the amount. you can borrow. For example, a couple with a combined income of €100,000 can borrow €350,000 under the rules. If they can get an LTI exemption, they can potentially borrow up to €500,000.
Take the example of Mary who previously owned an apartment with an ex-boyfriend. She wants to buy a house now. Despite saving hard for two years and keeping a clean credit and banking record, she’s 2% to 3% short of the 20% deposit.
An opportunity has come up to buy her dream house and at a great price, as the sellers are emigrating and are looking to sell quickly. Lenders tend to prefer applicants who have a particular property in mind and will complete the transaction in the short-term. With the assistance of a good broker, buyers like Mary who tick the right boxes may be able to secure an exemption from her bank under either the LTV or LTI rule.
Decisions are made on a case-by-case basis. Most lenders will require a minimum level of income; for example, a sole applicant will need an income of €40,000 or joint applicants will be earning at least €70,000, but this varies from bank to bank.
Remember, as stated earlier, you can apply either for a greater LTI multiple or a higher LTV, but not both.
Note: if you receive an exemption on the loan to income rule, allowing you to increase the amount you can borrow, you will need a bigger deposit.
It’s also worth noting that if the gap between what you need to borrow and what you can under the current rules is relatively small, e.g. €10,000 or so, it’s unlikely your bank will “give up” an exemption as it’s the whole loan that is classified as an exemption as opposed to just the amount of €10,000 over 3.5 times the income.
In conclusion, trading up can be more straightforward than people may think. With the right advice from an authorised mortgage broker, who will navigate you through this process, approval can be obtained even if your situation is not clear cut at the outset. There is some excellent value in properties at the moment so the best advice is to do the research and groundwork now and be ready to make your move when the time is right for you!
On Friday 16th April, it was announced the KBC were looking to sell their Irish business to Bank of Ireland. The understandable uncertainty has led to many of their mortgage holders looking at moving their mortgage to another lender for a greater sense of security. We have received an influx of calls from mortgage holders with KBC, asking whether or not they should be looking to move their mortgage to a different bank and what their options are.
This process will take some time to complete and KBC continues to have a duty of care to current customers and obligations to fulfil in that regard, so mortgage holders should not be worried or anxious.
That said, it would be prudent to look at this time as a chance to review your current position mortgage-wise – primarily what rate you are paying, and how this compares to what is currently being offered in the market. Although KBC’s departure from the Irish market is not a positive development in the Irish banking sector – particularly, from both a competition and an employment perspective, the uncertainty surrounding KBC’s future could at least turn out to be a beneficial wake up call to mortgage holders who are paying rates in excess of what they could get elsewhere.
The arrival of Avant Money to the market has seen many mortgage holders with mature mortgages, and/or a strong loan to value, switch to exceptional market-beating rates.
We are advising any KBC customer that is on a rate greater than 2.3% to review their options. But this doesn’t apply to KBC mortgage holders alone – anyone paying more than this, regardless of which lender they are with, should be talking to an expert to see if they can get a better deal either with their current lender or with a different provider. And don’t let whether you are on a fixed or variable rate stop you – you may well still have options to move.
If you would like to complete an initial assessment to see what potential savings you could make by switching, click here for the form and we will review and respond to you directly.
Should I switch?
Just like you shop around for cheaper or better car insurance or electricity provider, it’s worth reviewing your mortgage every few years to see if you can make savings.
What is Switching?
Switching is the term used to describe the process of changing mortgage provider. This is usually done to get a lower interest rate on your mortgage from a new lender with a view to saving money on interest.
Some people go through the entire term of their mortgage without considering whether their lender is offering them the best rate. However, it is prudent to review the terms of your mortgage on a regular basis – perhaps as part of a wider financial ‘health-check’. You don’t need to switch every year, but it’s a financially savvy move to take the time to consider the current market, the value of your property, and the interest rates on offer from all lenders on an ongoing basis.
My Neighbour is Doing it – Can I?
The answer is, most likely, yes. I estimate that one in every three mortgage holders would save by switching. (I am not including European Central Bank related tracker interest rates in these figures as they currently offer low interest rates given that the ECB base rate is 0%, meaning a typical tracker mortgage interest rate is approximately 1% and such mortgages have not been available in Ireland since 2008.)
If you have been on the same rate for more than three years, or you are coming to the end of a fixed rate period, then you should certainly review your options.
Regardless of whether you are a variable or a fixed rate mortgage holder, you could potentially save tens of thousands of euros over the remaining term.
The Myths and Misconceptions
– ‘I can’t switch if I’m on a fixed rate.’ Not true. You can break a fixed rate contract. We see many banks currently do not have a breakage fee however you may be charged a breakage fee by your lender, but the savings you make upon switching, plus, potentially, any cashback offer from a new lender, could more than cover the charges. In addition, due to the current low cost of funds available for banks, many don’t impose a fee for exiting a fixed rate contract. You will need to call your bank to check this, however.
Looking at Mick and Fiona for example, they have a home loan with €300,000 outstanding. They are currently on a fixed rate of 3.6% for the next two years with 28 years left on their mortgage term. They contact their bank to check the early fixed rate breakage fee and are advised that the fee is €1,050. They contact a mortgage broker who advises them that if they switch lender, they can obtain a two-year fixed rate of 2.3%, which will reduce their monthly payment from €1,418 to €1,211 which is a saving of €207 monthly or €2,484 annually or €4,968 over the two-year period. So, in this example, even though Mick and Fiona are liable to pay a breakage fee of €1,050, it is worthwhile as they will save €4,968 over the next two years alone.
Mary & John
Fixed 2 Yr interest rate 3.6%
Fixed 2 Yr interest rate 2.3%
Monthly repayment €1,418
Monthly repayment €1,211
Total savings over term €4,968*
*savings excluding breakage fee
– ‘I need to have a LTV of less than 80% on my home.’ Again, not true. While some lenders will offer you a better rate according to the amount of equity you have built up, you can still switch if your LTV is between 80% to 90%.
– ‘Switching is a long and difficult process.’ Not true. Switching can be straightforward with the help of an expert and some banks require less documentation for switchers than for a new application.
– ‘I’ll just end up spending any savings made on the legal costs of conveyancing’. (Conveyance is the legal term for processing the paperwork involved in buying and selling a property and transferring the deeds of ownership). Not true. You will know in advance, once you or your broker runs the numbers whether the savings made will outweigh any ancillary costs that may be incurred. If you stay with the same lender but move to a different rate, then you may not incur any additional costs.
Cash Back on Switching
The impact can be significant. If we look at Rua and Kerry’s experience, they took a €400,000 mortgage over 35 years at a three-year fixed interest rate of 3.6%. The interest rate they selected at the time of draw down was reasonably competitive and they also received upfront cashback from their lender. However, their rate is now changing to a higher variable rate of 4.2%. Their payments will be going to €1,805 monthly. They have tried to negotiate a lower variable rate with their current lender without success so they decided to switch to a lower variable rate of 2.95% with another lender which will reduce their monthly payments to €1,534. This will save them €268 monthly or €3,212 annually or €102,912 over the remaining 32 years of their mortgage. In addition, they receive €2,000 from the new lender, which covers the legal fees involved in switching.
Ruth & Ken
Fixed 3 Yr interest rate 3.6%
Variable interest rate 2.95%
Monthly repayment €1,802
Monthly repayment €1,534
Total savings over term €102,912
What Will I Need?
If you decide to proceed with switching, you will need to go through the mortgage application process and submit your documentation. This varies from lender to lender. Typically, you will require the following documents:
– Passport Identification.
– One recent payslip, Employment Detail Summary and salary certificate.
– Three/six months recent current account statements – depends on lender requirement.
– 3 Most recent credit card statements.
– Most recent mortgage statement.
– Relevant application form and bank declaration.
Where Do I Start?
– Contact your existing lender to confirm your rate of interest, balance outstanding and term remaining on the mortgage.
– If you are on a fixed rate, ask your lender what fee, if any, they charge for breaking the mortgage contract.
– Ask your current lender to review your interest rate and enquire about variable and fixed-rate options for an existing customer.
– Contact a mortgage broker and ask them to compare your existing mortgage terms to what’s on the market. (Technically, you can do this research yourself, but it will mean numerous calls to multiple lenders so in reality it’s probably not the easiest route for you to take.) The more equity you have in your home, the better the new terms you’ll be offered, but you can switch even if your loan is 90% of your value.
– Your broker can check what incentives other lenders are offering to switchers. The ‘incentive’ usually covers the legal costs, as well as any possible breakage fee, although this would need to be worked out on a case-by-case basis.
– Assess the best value option for you. A broker can run calculations on the interest rates you have been offered to see the potential savings you can make. This should not be a complex process. But there is market research to be done and there are lots of forms to be filled and boxes to be ticked. A broker will do all the legwork, calculations and communicate with lenders on your behalf and explain all of your options.
– You will need to decide whether to stick with your current lender or move to a different one. Moving to a different provider will mean going through the mortgage approval process again. Changing lenders can be relatively simple if you have expert help.
– Ultimately you need to ask yourself a question: why would I stick with a lender that is not giving me the best value?
Take your time, weigh up all your options and seek expert advice to help you decide if switching is the best course of action.
How Much Can I Save?
Switching to a lower interest rate can save you a considerable amount of money in the long term depending on the rate and capital amount.
Let me give you an example of savings on an interest rate reduction of 1.6%. By switching from a 4.2% rate to 2.6%, a mortgage holder with a loan of €350,000 over 30 years can save over €300 per month, €3,732 per year or €14,897 over 4 years.
Variable interest rate 4.2%
Variable interest rate 2.6%
Monthly repayment €1,712
Monthly repayment €1,401
Total savings over 4 years €14,897
In summary, it costs mortgage holders absolutely nothing to explore what ‘switching’ their mortgage can yield them in interest savings. I have sought to challenge and address any lack of knowledge or awareness by outlining the process and the financial benefit to be gained from taking this step.
People can often be put off by their first mortgage experience, which for many is stressful. However, the second time round should be a lot more straight-forward. Yes, of course there will be forms to fill, but the rewards for this bit of administration can be in the region of thousands and life changing as a result.
Q My husband and I have our eye on a nice ‘fixer-upper’ for €120,000. It’s a bit of a project and needs about €100,000 to bring it up to scratch. We wonder how much can we borrow as second time buyers? Is it 80pc of the sale price, or 80pc of the house plus the cost of renovation works?
A As second-time borrowers you can borrow up to 80pc of the value of the home, according to head of credit at MyMortgages.ie Joey Sheahan. If you propose to spend in the region of €100,000 on construction, for example, you can borrow 80pc of the cost of the works once the value of the property increases by the amount of the works. Therefore, if you are keen on the house from your viewings, get an engineer, architect or quantity surveyor to cost the works.
So you’re thinking of buying a fixer-upper? Maybe it is a faded period charmer that hooked you, or an ugly bargain on a great street. But before you sign a contract, some hard questions will help you sort the diamond in the rough from the money pit.
When, halfway through a home renovation, TV presenters announce “Asbestos!’, building surveyors must scratch their heads. “It makes good telly, but that would have been evident if a good inspection was done on day one,” says Noel Larkin of Noel Larkin and Associates Chartered Building Surveyors. His top recommendation for those buying an old house is to get a building survey done first. This should eliminate surprises and indicate the cost of renovation.