For almost any costly service, it makes a lot of sense to shop around and switch to cheaper providers every so often. Granted, the process of switching some services is easier than others. Mobile phone, broadband, TV, energy and insurance providers are generally a doddle, while services like banks and mortgages require a bit more effort, co-ordination and paperwork.
n terms of the financial reward-to-effort ratio, though, switching mortgages comes out firmly on top. You might save €30 a month by switching broadband; maybe €300 by switching your car insurance; and possibly up to €500 if you change both your electricity and gas suppliers. But you’re talking about annual savings of well into four figures by switching your home loan provider.
According to a 2020 report on the mortgage market by the Central Bank, 61pc of eligible mortgage holders stood to save over €1,000 in the first year after a switch and more than €10,000 over the remaining life of their home loan. A smaller but still significant number of eligible mortgage holders – 13pc – stood to save up to €30,000 over the life of their mortgages.
These figures may well be on the conservative side, particularly for large mortgages on homes in prime locations where owners are paying much higher than the current average new mortgage rate of 2.79pc.
According to the latest Doddl.ie mortgage switching index, borrowers are missing out on average savings of €4,175 every year. It’s estimated that some 200,000 households are paying rates of up to 4.5pc, even with rates of 1.95pc now available.
Needless to say, those on tracker rates should stay where they are, as they remain the best value mortgage products, especially since they are no longer available.
1. Not making that switch
Just 2.9 pc of the people in a position to switch providers – or even rates within their current provider – did so in the second half of 2019. So despite the “significant potential savings” available, to use the Central Bank’s words, why do so few of us do it?
Mortgage broker Joey Sheahan of MyMortgages reckons that, aside from a lack of knowledge of the options available to them, mortgage holders tend to perceive the switch as not worth the hassle.
“I think people are put off by their first mortgage experience, which for many was stressful as they tried to juggle a rental property and get a sale agreed on their new home,” he said.
“The time lapse between these can be difficult, or perhaps there were delays on the part of the property sellers etc. 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 admin can be in the region of thousands.”
There is evidence of an uptick in mortgage switching as a result of the pandemic, according to Trevor Grant, chairperson of the Association of Irish Mortgage Advisors.
“Covid and home-based working has significantly increased the amount of time borrowers have to get their documents together and this has seen a subsequent rise in the amount of switching activity.”
Many Ulster Bank and KBC mortgage customers are likely to be considering the switch in the months ahead too, given the two banks’ impending exit from the mortgage market here.
You may not even have to switch from your current lender. “All homeowners who’ve had a mortgage should contact their existing lender and confirm the rate of interest, balance outstanding and term remaining on the mortgage,” said Sheahan. “They should then ask if the interest rate they are currently on is the best available and ask what rate options are available to them as an existing customer.”
It might be that their offer is good enough and the switching process may well be simpler because you’re not switching lenders, but asking a broker to shop the market for you should help ensure you can find the greatest possible value. They are also a good option if you’d rather avoid the paperwork. For around €500 (or, in some cases nothing, as they receive commission), a broker will handle all the work.
According to Grant, mortgage brokers now account for 37pc of all mortgage approvals.
The application process has sped up thanks to new tech platforms like OnlineApplication.ie, which claims to speed up the process by 50pc, with the initial application to a basic approval being achieved in less than 10 minutes. Other brokers report that their application processes are much quicker than they used to be.
2. Making the numbers work
You can use the mortgage switching calculator at the website of the Competition and Consumer Protection Commission (CCPC) or else the price comparison sites Bonkers.ie or Switcher.ie, to see how much you might save.
The key factor influencing how much you can save is the loan-to-value (LTV) ratio, which is how much you owe on your mortgage in relation to how much your house is worth.
You can check your loan-to-value ratio by dividing the house’s value (see propertypriceregister.ie or local estate agents for an estimate) into the outstanding balance on your mortgage (ask your bank or check your last mortgage account statement).
So if you have €150,000 left on your mortgage, and your house is worth €300,000, then your LTV is 50pc. Lenders will look at your loan-to-value ratio when considering your mortgage application. In general, borrowers with lower LTV ratios will qualify for lower mortgage rates than borrowers with higher LTV ratios.
For someone on a mortgage of €250,000 remaining on a house worth €500,000 and paying around €1,800 a month at an interest rate of 3.5pc over 15 years, they would be saving nearly €200 a month – over €2,200 a year – if they switched to a three-year fixed rate of 1.95pc.
There may be a perception that only those mortgage holders with a reasonable amount of equity stand to benefit the most from switching, but those with less can still expect to make gains.
“Those that have made significant inroads on their mortgage and now have an LTV of less than 50pc will save the most, but even those still at 80pc stand to save hundreds if not thousands each year,” said Sheahan.
Let’s take an example of a mortgage with 75pc LTV, where the remaining balance on the mortgage is €225,000 on a property worth €300,000 and you’re repaying around €1,100 a month at an interest rate of 3pc over 25 years. You’d be saving around €80 a month if you switched to a mortgage with a 2.5pc fixed rate – nearly €1,000 a year.
“Many of those with the potential to save are paying 1pc to 1.5pc more than they should,” said Grant, adding that anyone on a relatively high fixed rate may find it would be worth paying the penalty to break out of it in favour of a better rate.
3. It pays to fix
Although you could switch to a variable rate, the value right now is in fixed rates, especially now that banks are more flexible about things like overpaying.
“Generally speaking, fixed rates are currently lower than variable rates so the majority of our clients are tending to fix,” said Sheahan. “Many lenders now have flexibility to overpay without penalty even when you are on a fixed rate. In the past this flexibility would not have been available with most banks so people tended to prefer variable rates.”
Grant says that the vast majority of mortgage customers – around 75pc – are availing of three- and five-year fixed rates.
When it comes to legal fees, what are the lenders going to do for you?
Fees won’t be as high as on a new house
There’s a bit of paperwork involved in switching mortgages, particularly if you’re switching to a different lender as opposed to staying with your current lender. But there’s also the legal fees to contend with, which can put some people off.
The good news is they’re not as high as you might expect because the cost and workload for the solicitor would be about half of what it is when buying a new property. You can expect to pay between €1,200 and €1,500, plus a separate valuation fee of €150, so the savings you can make by switching can wipe out the cost of paying them within a year or so.
But you may not even need to pay the full cost. As a clear sign of increasing competition in Ireland’s property market, most banks are now offering to cover some or all of your legal fees to encourage borrowers to switch, or else cashback deals that you can put towards your legal fees if you choose.
AIB
You’ll get €2,000 cashback within two months of switching your mortgage to AIB.
Ulster Bank
Switch to Ulster Bank, you’ll get €1,500 towards your legal fees within two months of drawdown.
Bank of Ireland
If you switch your mortgage to Bank of Ireland you’ll receive an unlimited 2pc cashback on the total value of your mortgage. So, if you have €200,000 left on your mortgage, you’ll get €4,000 back in cash upfront.
Existing Bank of Ireland current account customers will get an additional 1pc of the mortgage amount back in cash after five years.
EBS
Switch your mortgage to EBS and you’ll get 2pc cashback on your mortgage at drawdown and an additional 1pc cashback in five years’ time.
Permanent TSB
Switch to Permanent TSB and you’ll get 2pc cashback on your mortgage on drawdown.
If you already have an Explore current account with PTSB, you’ll get another 2pc on your mortgage repayment every month.
Keep the cashback
Trevor Grant of the Association of Irish Mortgage Advisors says that many customers believe or have been led to believe that if they leave the lender early, they will have to repay any cashback they receive.
“They do not,” he says.
It’s worth noting that the lenders with the cheapest rates on the market at the moment, including Avant Money, don’t offer cashback or legal fee offers at all.
At the end of the day, when it comes to saving money over the lifetime of the loan, what counts is the rate.
