Switching is back in the news again, with the high interest rates paid by Irish mortgage customers even coming to the attention of the president of the European Central Bank, thanks to the efforts of Irish MEPs.
Irish homeowners continue to pay a surcharge of almost two percentage points compared with their European peers. Recent data from the Central Bank shows that the average standard variable mortgage rate in Ireland is 3.6 per cent.
Whether a change is forthcoming, however, is another thing.
The governor of the Central Bank, Philip Lane, recently ruled out any legislation to curtail interest rates, arguing that it could deter potential market entrants and change the nature of the market as banks focus on "super-safe" customers.
And in the absence of any new entrants – at least for the time being – competitive forces are unlikely to “encourage” banks to drop their rates.
So what can consumers do to demonstrate their dissatisfaction with the excessive cost of their mortgage loan? The obvious answer is to switch their mortgage to whomever is offering the cheapest rates on the market.
However, consumers appear loathe to do this.
"Irish people don't tend to have an appetite for switching, " says Sean Couch of the Dublin Mortgage Company.
He’s not wrong. A 2015 survey from the Competition and Consumer Protection Commission (CCPC) showed that just 2 per cent of mortgage holders have actually switched in the past five years. This is despite the fact that the Central Bank found last year that some 109,705 people could save money by switching mortgages.
So why are we so reluctant, and what are the benefits of switching?
Considerable savings
If you’re on a higher variable rate, the benefits of switching to a lower rate can be significant, and can save you a considerable sum over the life of your mortgage.
Consider the example of someone with €250,000 left on a mortgage over 24 years at a rate of 4.5 per cent. If they secured a rate reduction of just 0.3 of a percentage point, they would save themselves €40 a month – or a significant €11,532 over the life of the mortgage.
If they secured a rate of 3.8 per cent – still above what the Central Bank states is the average – the savings would be even greater, at €92 a month, or €26,673 in total, assuming rates stayed the same over the life of the loan.
Generally speaking, the higher the mortgage, and the longer the term to maturity, the greater the potential savings.
Valuation required
Switching your mortgage isn’t free. Banks to which you want to move your loan will typically require you to get a valuation of the property carried out ahead of switching. You can expect this to cost upwards of about €130 plus VAT and generally this isn’t paid for by a bank. Additional administration fees or costs associated with the deeds may also apply.
In addition, as when you first bought the property, you will need legal advice to move your mortgage. Typically this will cost about €1,000, but the good news is that several banks are stumping up the cost.
Both Permanent TSB and Bank of Ireland, for example, are offering those who switch a 2 per cent cash-back on the value of their mortgage (until September 30th in the case of BOI). So a €300,000 mortgage will see the homeowner benefit to the tune of €6,000 – more than enough to cover any legal fees.
Of course, there are terms and conditions; PTSB, for example, “reserves the right to seek refund of payment of the cashback if mortgage is redeemed in full within five years”. And the 2 per cent offer is not available to negative equity or buy-to-let loans.
Ulster Bank is offering €1,500 towards the cost of your legal fees before June 30th, while KBC Bank will give you €2,000, as well as 50 per cent off the cost of your home insurance for one year and AIB will give you €2,000.
Similarly, at EBS, if you move your mortgage again within five years, you will have to pay EBS €777 to cover the initial legal fees for switching.
Bear in mind that, with some banks, you will have to pay the legal fees upfront, with the €1,000 or so reimbursed thereafter.
And beware attractive-sounding offers; availing of the lowest rate on the market may secure the biggest rewards for you, not the bank offering the biggest cash- back.
Shopping for best rates
As the table above shows, shopping around for the best rate can reward you handsomely over the life of a mortgage, particularly if you purchased recently and are on a higher standard variable rate.
Despite the lack of new entrants, there are signs the market is getting more competitive. Last month Ulster Bank announced one of the cheapest rates on the market when it said it would link up with consumer group One Big Switch to attract homeowners to switch to the bank.
Some 8,000 mortgage holders are said to have expressed interest in the offer, which promises a four-year fixed rate of 3.29 per cent. The bank’s existing offer of free legal fees and property valuation also applies, It certainly shows a commitment on the part of Ulster Bank to grow its market share: it will now have to pay One Big Switch a fee for each mortgage it secures via this channel, in addition to the commission it usually pays brokers.
However, the deal is quite restrictive in that it is only open to mortgage customers whose LTV is less than 60 per cent. And, of course, switchers must also meet the bank’s credit and affordability criteria. Moreover, it is due to end on May 20th.
Credit union switches
Depending on the size of your mortgage, you might have an option other than your local bank: your local credit union.
For example, St Patrick's Credit Union in Dublin has a special "Mortgage Switch Loan" which it offers to members looking to clear their home loan. It is only suitable for those who can afford to repay their loan over 10 years, and the LTV on the loan must be 50 per cent or less.
The Teacher's Union of Ireland credit union offers a similar product for its members, up to a maximum loan amount of €150,000.
You may find, however, that the rates on offer are no more competitive than the banks. The aforementioned St Patrick’s CU, for example, offers a rate of 4.25 per cent, while the Teacher’s Union of Ireland’s product has an APR of 3.99 per cent. And you will have to stump up for the legal costs yourself.
Switching challenges
If you are on a fixed rate, it can be expensive to switch. And there are other difficulties. While the Central Bank rules on mortgage lending don’t apply to switchers, Sean Couch notes that it’s difficult to switch unless you have an LTV of less than 80 per cent.
“The rules don’t apply, but the reality is that to get a good deal off the banks, you need a low LTV,” he advises.
This will likely preclude people who bought in the boom and still have hefty LTVs on mortgages that may or may not be in negative equity.
Another ongoing challenge is people’s changing circumstances. After all, switching a mortgage means going through the whole underwriting process again, and people may fear – rightly so – that they won’t be approved again for a similar mortgage.
“It’s like a new mortgage application,” Couch says, noting that everything you had to give for the original (payslips, six months of bank statements, etc), you have to provide again. The process to switch usually takes about two months from start to finish.
This means that if you got your original mortgage when you didn’t have children, you might find it difficult to qualify on the affordability criteria if you are now paying handsomely for childcare. Or perhaps you have cut your hours at work since your original mortgage was approved.
If the Government was to consider encouraging people to switch more regularly in order to boost competition, one way it could do so would be to lighten the documentation required to switch.
The costs: Breaking out of a fixed rate mortgage can be very expensive
To be able to switch a mortgage, homeowners must typically be on a variable rate mortgage.
Given the ongoing slump in interest rates, those with tracker mortgages (about 50 per cent of the mortgage market) are still holding on for dear life and would be crazy to consider switching, which would inevitably mean losing their cheap tracker. So this leaves the rest of the market.
However, the past few years have seen concerted efforts by banks to get as many customers as possible on to fixed rate mortgages. This means the number of homeowners in a position to switch has shrunk considerably.
Look at the example of Bank of Ireland. According to its most recent annual report, fixed rate products accounted for about 65 per cent of BoI’s new lending in the second half of 2015 – up from about 30 per cent just a year ago.
This means that two-thirds of new purchasers will be unable to switch for up to 10 years, depending on how long they fixed.
And of BoI’s overall mortgage book, some 16 per cent are now on fixed rates, up from 9 per cent in 2014. A further 52 per cent are on tracker mortgages. This leaves just 32 per cent of the bank’s mortgage customers on variable rates and in a position where switching is a viable option.
While it’s not impossible to switch if you’re on a fixed rate, it is more expensive. Your current lender will likely charge you a break fee to compensate them. This can stop many people from switching, as the size of the fee may mean that it is less attractive financially.
The level of the fee will depend on the size of the mortgage and the amount of time outstanding on the fixed rate – and it can be significant. A recent customer of Sean Couch’s, for example, was quoted a fee of €2,200 on a mortgage of about €250,000.
Working out the level of the fee is tricky – and there must be scope for more transparency in how bank’s calculate it. “You couldn’t work it out; it should be much more straightforward,” says Couch of the banks’ formulas.
AIB, for example, gives its formula as follows: Early break cost = A x U x D%.
“A” is the amount of the prepayment or early repayment following demand by the lender, or the amount of the conversion. “U” is the unexpired term of the fixed interest rate period. “D” is the difference between the fixed interest rate applying to the facility and the fixed interest rate that would then apply to the facility for the amount of “A” for the term of “U”.
Unfortunately for many of us, working out this sum is a step too far, although the bank does give a further example for someone with a mortgage of €100,000, fixed for 60 months at a rate of 7 per cent.
If they repay after 36 months (ie by switching to another bank), they will face a breakage cost of €4,000 (€100k x 24/12 x 2% = €4,000).
