Less than 1% of customers switched their mortgage last year, according to the Central Bank. That’s shocking. It is due to lethargy, because average savings of €2,000 to €3,000 a year could be made.
Many of us are put off by our first mortgage experience. It can be stressful, especially if you are paying rent while getting a sale agreed on a new home. The irony is that the second time would be more straightforward.
A recent survey by the Competition & Consumer Protection Commission (CCPC) showed that while 86% of us knew our monthly mortgage payments to the last cent, less than half of us knew the interest rate we were paying.
Thus, we are unaware if we are getting good value or not on what we owe the bank. Switching your mortgage isn’t as painful as it might seem. Reviewing your current mortgage offering is the best place to begin.
There are three types of mortgage: Trackers, fixed-rate, and variable rate. If you have a tracker, it is generally very attractive, especially while interest rates remain low, so you are likely to be a lot better off sticking with your present mortgage.
If you are on a fixed rate, your current lender could charge a breakage fee. While switching might still be financially rewarding, it is best to contact your current lender to understand how much this would cost. It might mean waiting until the fixed-rate period ends, but it is still good to assess your options and get ready for when your mortgage comes off the fixed rate.
For those of you on a variable, you are free to move and the first thing to do is to assess the current rate you are paying versus the best rates in the market.
As a ready reckoner, 3% is currently a good rate to aim towards. If the rate you are paying is closer to 4%, my advice is to get onto this as a priority. Even a small difference in the rate you pay can add up to a substantial figure, such as €20,000 to €30,000 in interest in the long-term.
Look at the CCPC’s mortgage comparison tool and switching section to get an idea of savings you can make and all of your options.
Once you have a rough idea of the current value of your property, you can easily see if the rate you are paying, even with your own bank, can be improved. Given that house prices have increased so much, the mere increase in the value of your home would reduce the cost of your repayments automatically. But you have to approach the bank, as they won’t tell you this.
One way to find out the value of your home is to look at the recent sale prices in your area, which would be available on the property price register and easy to obtain.
Your loan-to-value (LTV) ratio, which is how much you owe on your mortgage in relation to how much your house is worth, is an important indicator. 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 example, if you have €150,000 left on your mortgage, and your house is worth €300,000, your LTV is 50%. Different lenders have different policies when taking on switchers and they apply their own LTV limits, which could, in some cases, be 80% to 90% of the current value of your home.
Any new loans or credit cards taken out since your first mortgage will be considered by your lender and if you are in mortgage arrears, you may not be able to switch.
Should you get a mortgage broker? Mortgage brokers do add value and while some of them charge an upfront fee — which, in many cases, is rebated to you, if you proceed with them — I feel it is justified. They will do a lot of the heavy-lifting.
According to David Sweeney, of Sweeney Solicitors, the legalities are generally more straightforward the second time around and some banks will cover these fees. Be mindful of being swayed by inducements, such as offers of free cash.
You could end up spending a lot more in interest over the period, so you need to focus on the rate of interest you pay. Whether you fix your mortgage now or stay variable is another consideration. Most new buyers are fixing.
Personally, I feel that with interest rates rising over the coming years, fixing at something like 3% over five to ten years makes sense. Educate yourself with the rate you are paying and take it from there. It would also make sense to review mortgage-protection and house-insurance costs.
Nick Charalambous is managing director of Alpha Wealth, independent financial advisors in Cork and Dublin.