Fixed-rate mortgage price war heats up

Last week, Ulster Bank introduced a five-year fixed mortgage rate of 2.2% which is the lowest fixed rate available over that time period in Ireland.

Fixed-rate mortgage price war heats up

Several banks are now offering 10-year fixed-rate mortgages in a sign of a move away from variable rates, writes John Hearne.

Last week, Ulster Bank introduced a five-year fixed mortgage rate of 2.2% which is the lowest fixed rate available over that time period in Ireland.

The rate will be available to first-time buyers, home movers and switchers who take out a mortgage of €300,000 or more and who have at least a 20% deposit or 20% equity in their home.

Daragh Cassidy of independent price comparison and switching site Bonkers says if your mortgage is less than €300,000, or you only have a 10% deposit, you’ll have to make do with Ulster Bank’s other, slightly higher fixed rates, but these are still highly competitive. For example, Ulster Bank also offers a 2.30% fixed rate over two years and a 2.60% fixed rate over five years.

He says too that despite this announcement, not to mention recent mortgage- rate reductions from other banks, mortgage customers in Ireland still pay among the highest rates in the eurozone. The average rate on a new mortgage issued here in November was 2.90% — some distance higher than the 1.37%, which, believe it or not, is the average in Europe.

“Ulster Bank has also become the latest lender to offer Irish mortgage holders the choice of a fixed rate over 10 years,” says Cassidy. “They offer a market-leading, 10-year rate of 3.15%to first-time buyers and 2.95% to home movers and switchers or first-time buyers with a 20% deposit. Slightly higher rates will apply though if someone is seeking an exemption to the Central Bank’s loan-to-income rules.”

Up until recently, very few lenders offered the option of a fixed rate for longer than seven years. Ulster Bank now joins Haven, KBC, Bank of Ireland and AIB in offering mortgage customers the choice of a fixed rate over 10 years

Central Bank figures released in the first days of the year confirm that the mortgage market continues to shift away from variable rates towards fixed rates.

The November Money and Banking Bulletin reported that variable-rate mortgages for principal dwelling houses fell €1.2bn in the third quarter of last year, while fixed-rate mortgages in the same category increased by €2bn. This is the largest quarterly increase in fixed- rate mortgages since the series began. Joey Sheahan is head of credit withMyMortgages.ie. He believes this could be the year of fixed-rate mortgages in Ireland.

These figures give weight to our own observation that more and more mortgage holders are recognising the value of fixed rates. They give certainty of repayments for the fixed-rate term, and often offer borrowers peace of mind when it comes to mortgage affordability and budgeting. Banks too have begun to sharpen their focus on their fixed-rate offerings.

He says it’s now possible to get 2.5% three- and five-year fixed-rate loans for houses with A and B building energy ratings. So while we may not be getting the same value as our European neighbours, rates are at least moving in the right direction. The bad news however, is that when it comes to mortgages, we’re not really as well informed as we should be.

The Economic and Social Research Institute (ESRI) has just released the results of an experiment fundedby the Competition and Consumer Protection Commission. A sample of mortgage-holders answered questions about how mortgages work and listed what they thought they would need to do if they wanted to switch.

The results showed that mortgage-holders tend to be seduced by cashback offers that ultimately offer very poor value for money.

On average, consumers preferred the €2,200 cashback to a 0.4% better annual percentage rate. However,a better mortgage rate is exponentially better than any of the cashback offers being heavily pushed by the banks.

The commission worked out that for the average mortgage, opting for the €2,200 instead of the 0.4% rate is equivalent to taking out a loan for €2,200 at 24% interest.

After reading the official advice, consumers placed much more weight on annual percentage rates and the long-term savings they could make. They also became more confident about picking good deals. The experiment, therefore, supports new regulations introduced in 2019, which require lenders to direct consumers to this advice.

The experiment also revealed potentially serious misunderstandings. When asked what they would need to do to switch, just one-third of mortgage-holders realised that they’d need a solicitor and only one quarter were aware that they would need to have the property revalued. These are typically the two biggest costs of switching.

What’s more, most consumers didn’t understand one or more basic aspects of mortgage products. They were confused about how repayments relate to the cost and length of a mortgage, the implications of paying only interest, or the extent of debt liability.

Fergal O’Leary of the commission said for most consumers, taking out a mortgage was the largest financial commitment they would ever make.

“It is crucial therefore that they fully understand the terms and conditions as well as the full long-term cost of the mortgage they choose. The research clearly shows it is worthwhile to take some time to review the independent information, including the mortgage comparison tool at ccpc.ie.

"This is the case for the first-time buyers but equally so for many consumers who could save on their mortgage by switching. Taking a few minutes to check ccpc.ie can help consumers cut through the advertising material and allow them to get the best deal for their needs.”

Trevor Grant of theAssociation of Irish Mortgage Advisors suggests that this research demonstrates the importance of getting expert advice before making any financial decision

“In some circumstances, cashback offers make sense for consumers. However, some people can be unduly swayed by the immediate promise of free money, even if it means they may have to pay more initially for their mortgage. Often these monies are earmarked for white goods or furniture and while this is perfectly fine, it is vital that the borrower understands any longer-term implications of their choice of mortgage provider.”

One other thing worth investigating if you’ reconsidering a first-time mortgage is the Government’s Help-to-Buy scheme.

This is a government tax-refund scheme designed to help first-time buyers get the deposit needed to buy a newly built home.

“The scheme is designed to help first-time buyers acquire the deposit necessary to buy a newly built home. Another goal of the scheme is to incentivise developers to build more houses and apartments,” says Daragh Cassidy of Bonkers.ie.

The maximum tax refund is 5% of the value of the property or €20,000. Whichever is lower. The rebate is only available on properties valued at €500,000 or less.

“This means that if you purchase a property for €400,000, you can claim the maximum rebate of €20,000. But if you buy a house for €500,000, the relief will be capped at €20,000,” he says.

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