Making Cents: Is now a good time to re-mortgage?
The must-read guide to saving money
THE Banking and Payments Federation Ireland (BPFI) published some really interesting data where it discovered that less than a third of mortgage holders have considered moving lenders in the past year.
They uncovered other data which revealed a certain level of apathy when it comes to people’s knowledge of their mortgage i.e. a large percentage don’t know what their current loan to value is, they don’t know what their properties BER energy rating was etc., and both of these factors can have a significant impact on the rate of interest a mortgage is charged at.
So, it was very welcome that the BPFI decided to launch an awareness campaign aimed at encouraging mortgage holders to look at their switching options and very importantly to show people what’s involved should they take that step and look at moving their mortgage to another lender.
This is important because the BPFI said the biggest reason people don’t move is because they are unsure about what the switching process looks like. The other reasons people don’t move is because they aren’t sure about the costs involved or what the savings and benefits of making the move are and this all leads to people doing nothing for fear of making a mistake.
And I’m old enough to remember when the re-mortgage market in Ireland was particularly big and that was back in the early noughties.
At the time you could move from one lender to another with ease and the process was very fast and you could consolidate any number of loans you had into one monthly repayment, or you could raise money by re-mortgaging which could be used towards buying a second property at home or abroad or whatever took your fancy.
Banks at the time were fighting for this type of business and were offering all sorts of financial incentives to get your mortgage moved to them.
But when the recession took hold and the property market crashed, the market for re-mortgaging vanished. It was next to impossible to move from one lender to another even if you were supposedly in stable employment and had a good repayment record. Unless you owed 50% or less than what your property was then valued at you didn’t stand a chance.
Anyway, the good news is that the re-mortgage market is back open, and it has been for a number of years and banks want you to move your mortgage to them and they are even offering cash incentives to do so, for example:
- AIB are offering €3,000 back in cash if you switch your mortgage to them
- Avant Money are offering 1% of your mortgage back in cash (minimum mortgage amount has to be €100,000)
- BOI are offering 3% of your mortgage back in cash where they will give you 2% up front with another 1% to follow in five years’ time
- EBS are offering the same deal as BOI but the caveat with them is that you have to choose one of their longer-term fixed rates, i.e. it’s not available if you choose their variable or one-year fixed rate
- Haven are offering €5,000 cash back on select fixed rates and if they take out a mortgage of €250,000 or more, and
- PTSB are offering 2% cash back upfront and you can also receive a further 2% cash back every month on your mortgage repayment until 2030 provided your monthly repayment is debited from their explore current account.
I don’t think cash back incentives should be the main driver behind moving your mortgage to someone else, it’s welcome of course it is but it should only be a bonus and just a consequence of a bigger reason you want to move, and that reason should be focused on what the long-term benefits to switching lenders are.
And in my experience, the main reason people move lenders is to get a better rate.
And if they can get a better rate, the benefits to it are having (a) a lower monthly repayment (b) lowering the total amount of interest they repay and (c) a lower rate could mean they use the monthly savings to do things like earning less or using the savings to accelerate the repayment of their mortgage, or the motivation is to ease monthly cash flow pressures or build up their savings.
There could be any number of reasons all personal to the individual.
Let’s look at what getting a better rate could mean. And I’m going to tell you about a real-life mortgage holder I encountered recently who owes €300,000. They have 20 years to run on their mortgage and their loan to value is 80%. They are being charged a variable rate of 4.7%, and their monthly repayment is €1,930.
If they stay with their lender and the rate remains the same over the term, they will pay back c. €163,317 in interest payments.
They were one of those people the BPFI were referring to in their report because they never looked at moving lenders, they just didn’t have the time, and they thought there wouldn’t be much of a difference between what they were being charged and what other lenders could offer.
And how wrong they were.
Because there was a variable rate available from another lender that was 4.15%, and if they moved their mortgage to them, their new monthly repayment would become €1,842 which meant they would reduce their repayments by €88 every month.
And they would pay back €21,300 less in interest payments over the duration left on their mortgage, if that differential remained in place.
So, that small interest rate difference i.e. 0.55% turned out to be not so small after all because it could end up saving them €88 every month in the short term and €21,300 in the long term because they will pay that much less in total interest.
And as the comedian Jimmy Cricket used to once say - and there’s more.
If this person used the reduction in their monthly repayment of €88 as an overpayment on their new lower mortgage i.e., they continue with their old monthly prepayment of €1,930 they would reduce the term on their mortgage by one year four months and they’d save a further €10,830 in interest payments.
And when their mortgage is repaid in full, they could reduce the amount they’d need to earn by about €38,600 because that’s what their mortgage is costing them each year. They have to earn that much to net down to monthly repayments of €1,930.
If someone sat down in front of them and pointed out that a 0.55% reduction in their monthly repayment that was available to them, it could create the following outcomes:
-Monthly repayment reduces by €88
-Interest saving of €21,300
-Term reduction of 16 months
-Further interest saving of €10,830
-They could earn €38,600 less each year when the mortgage is repaid
Then perhaps they would look into whether they should consider moving their mortgage because these are five big numbers and five big reasons why.
And my last point with this person was they thought their loan to value was 80%, it could be even lower. They didn’t really know but it’s worth finding out because if the LTV was lower than 80%, then they could get an even better rate at 3.95% and the savings become even bigger.
Along with looking at what other mortgage lenders are offering, you should also need to think about what you can get from your current mortgage lender as well and these are some of the questions you should ask yourself and them:
1. What are my current repayments and am I able to lower these? If my loan to value ratio is lower than it was when I first took out my mortgage, would that reduce my rate? What about my energy rating, would that reduce the rate, and the answer is yes with some lenders and some products they absolutely will.
2. Does my current rate still meet my requirements, e.g. fixed or variable?
4. What costs are involved in moving i.e. solicitor costs, valuation reports?
5. Am I saving enough to justify moving?
6. Does my existing mortgage have any redemption penalties if I did want to move?
When people think about switching mortgage providers the very thought of doing so conjures up images of nothing but hassle and in some cases they’re right because there is work involved and it's not something that will be completed overnight and Yes you will have to fill out paperwork but if it isn’t going to cost you anything other than your time and the savings are meaningful to you, then it’s probably something worth doing.
So, before you rule anything in or out, I’d say run the numbers or get someone to run them for you and then make up your mind.
And the BPFI will help in this regard because they have launched a new website called, InYourInterest.ie, and it provides information for people who want to learn more about mortgage switching, so definitely worth checking that out.
Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at [email protected] or www.harmonics.ie