Short-term mortgage offers attract but may cost more in long run

Many mortgage holders in Ireland have little understanding of how their house loans work at their most basic level, new research reveals.

A study by the Economic and Social Research Institute (ESRI) has found consumers make better long-term financial decisions about their mortgages after receiving official State advice about switching their loan provider.

However, the same study found that people are attracted to apparently beneficial offers which may cost them more in the long run.

The results of the controlled experiment, which asked mortgage holders practical questions about their loans, indicate a relative ignorance among consumers of the importance of the annual percentage rate (APR), the standardised means for comparing different lenders’ offers, when taking out a mortgage.

In one instance, consumers preferred on average to receive a €2,200 cashback offer versus a 0.4% better APR rate, despite this equating to taking out a loan for the same €2,200 amount at 24% interest.

The study’s respondents who read the official advice from the Competition and Consumer Protection Commission, however, placed a far greater weight on APR and the long-term savings that could be achieved by going with a lower rate.

In addition, they became more confident about picking deals of benefit to them.

The ESRI said its research supports the introduction of new consumer regulations by the Central Bank in January 2019, which compel lenders to direct customers towards the CCPC when communicating with them, for example towards the end of a fixed-rate payment cycle.

“There are large gains to be had for many families by switching mortgages, so it is encouraging to see that reading official advice improves consumers’ decision-making and their confidence,” said the ESRI’s Shane Timmons.

The researchers warned, however, that the results they had seen suggest “potentially serious misunderstandings” on the part of consumers when switching a property loan.

Two-thirds of mortgage-holders were unaware of the need to hire a solicitor, while three-quarters of the survey sample were ignorant of the need to revalue the property, traditionally the two largest expenses incurred when switching.

Furthermore, the control group showed low levels of understanding of the implications of paying only interest, or of who is responsible for outstanding debt on a mortgage should the value of a property decrease and the repayments become untenable.

“People were of the impression that if they were in mortgage arrears and posted the keys to the house back to the lender then they were absolved of liability. That is not the case,” said Mr Timmons.