What's the most sensible mortgage deal?

This week our resident financial guru Grainne McGuinness looks at mortgage offers and gives her few cents on what she thinks is a sensible deal.

What's the most sensible mortgage deal?

Hi Gráinne,

Today I received an option from my bank, Permanent TSB to switch my standard variable rate mortgage to a managed variable rate mortgage. I am quite confused about this offer. If I switch I will save but I’m wondering in the long term what’s the catch? I am terrified to make a wrong decision and I don’t know who to ask about this. I considered ringing the bank but I just don’t trust them. Can you help me by explaining how this will affect me if I accept?

— Mandy, Swords, Co Dublin.

The letter-writer is not alone, Permanent TSB is offering more than 70,000 customers the opportunity to move from their standard variable rate to a new managed variable rate (MVR). The new interest rate being offered to customers is dependent on the amount owed and the value of the property in question . Banks call it loan to value (LTV) . Put bluntly, the less owed as a percentage of the home value, the better the interest rate the bank will offer. Customers with a LTV of 50% or less will be offered a rate of 3.7%, rising to 4.3% for LTV of 90% or more.

But even 4.3% is better than PTSB’s current SVR of 4.5% so on the face of it, any customers offered the MVR will benefit.

“If a customer on a variable rate deal is offered a lower rate, they don’t have a lot to lose,” he said. “As a general rule, if offered a lower rate on debt you should take it,” said Stephen Curtis, Personal Insolvency Practitioner with the Irish Mortgage Holders Organisation (IMHO).

“What PTSB are saying is that for certain customers, where the value of the house is higher and therefore the risk is lower, those customers will get a better rate.”

Mark Whelan of bonkers.ie agreed, saying: “PTSB’s new ‘managed variable rate’ should bring about savings for those who take up the offer in year one at the very least.”

He understood the writer’s reluctance to readily accept the new arrangement.

“It’s always wise to be wary of incentives from banks to change mortgage structures — there are some gimmicks on offer these days that don’t necessarily add up to savings over time,” he said.

“Borrowers should check to see what their overall cost (including APR and fees) will be in year two and beyond on their new ‘managed’ rate to be sure that the rate change adds up to savings over the full lifetime of the loan.”

The new rate is variable and subject to change by the bank so it could theoretically end up costing the customer more, but it seems remote that it would become more expensive than the SVR.

“Potentially down the line, Permanent TSB could drop their standard variable rate by more than the MVR, but this is unlikely,” Curtis felt. “It is more likely that the two rates would track each other.”

A key point to note is that the bank will cover the cost of a new valuation for the property, so customers can find out what rate they are eligible for and get an up-to-date valuation for their house for free.

“It doesn’t cost the customer anything to get the house valued so they may as well apply and see what the bank offer,” Curtis said. “If at the end of the application, they decide not to go ahead and instead stick with their existing deal they can; they are under no obligation to accept the offer.”

Given the amount of people struggling with high variable rate mortgages, Making Cents asked Stephen Curtis if the IMHO would like to see the other banks offer similar deals.

“No, because this offer is only being made to certain people,” he answered. “PTSB are cherry-picking the customers they want to reward. We would prefer to see is banks reduce their rates across the board.

“People who bought houses between 2005 and 2007, with no idea of what was going to happen in the market, are now caught with negative or marginal equity in their homes.

“We would prefer a rate reduction for all borrowers, even if that meant a lower rate reduction”.

DEAL OF THE WEEK

The weather is changing with a vengeance so now is the time for consumers to check they are getting best value in utilities. Review your gas and electricity plans now before the winter bills start.

Energia are promising savings of more than €300 in the first year to new customers who switch over to their SmartChoice Dual Fuel offer. The offer bundles their Electricity and Gas options. There are a range of discounts to standard packages, with extra savings if you use online billing and pay by direct debit. The total discounts work out at 17% in the first year on your gas bill and 20% on your electricity bill.

The offer involves signing a 12 month contract with Energia so you can review your options when the discounted rates come to an end.

It is worth noting that you can still switch if you are receiving an allowance from the Dept of Social Protection for gas or electricity, you just have to give the Department a call when you’re switching. They can pay it directly into your bank account.

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