The mortgage price war, which started in the summer, has continued into the autumn – making it easier for first-time buyers and homeowners in general to get a much more favourable deal on their mortgage. KBC Bank, Permanent TSB, and Ulster Bank are among the latest mortgage lenders to cut some of their rates, and more are expected to follow this trend. Homeowners and house hunters should definitely take full advantage of this price war to get the cheapest mortgage possible.
Here’s how you can do it:
You could save tens of thousands, possibly even hundreds of thousands, in mortgage interest by changing from a standard variable rate (SVR) mortgage to a cheaper home loan offered by your current or another mortgage lender.
The saving will depend on three variables:
Standard Variable Rate mortgages are usually not offered to new borrowers today, but if you have had your mortgage for a couple of years or more and you have never changed your interest rate, you could well be on a SVR. The most expensive SVRs are charged by the Bank of Ireland and Permanent TSB with a 4.5pc rate. At this interest rate, you will be paying tens of thousands more for your mortgage than you needed to.
Let’s say, for example, that over the next 20 years, you have €300,000 left to repay on your mortgage, you’re on a SVR of 4.5pc, and your home is worth €500,000. You would save close to €70,000 in mortgage interest over the next 20 years by switching to the cheapest variable mortgage offered by ICS Mortgages for such a borrower, and close to €58,000 by switching to Haven, AIB or Finance Ireland. You may not even have to change lender to get a cheaper rate.
Even if you are not on a SVR, the interest on your mortgage could still be much higher than necessary. You could be paying a variable rate of around 4pc or more on your mortgage, even though you are eligible for a rate of around 3pc or lower.
So, if you have a variable mortgage, make sure you are on the lowest and cheapest rate you are eligible for. Any recent uplift in the overall value of your home could mean you qualify for a much less expensive mortgage.
All Irish banks offer cheaper mortgages to those with low LTVs – commonly known as LTV (loan-to-value) mortgages – to buyers who are borrowing less than 80pc or 90pc of the value of their home.
So, whether you are trading up – or you just want to make your existing mortgage cheaper – ask your current bank if it can offer you a cheaper interest rate. Then you can compare that rate to the ones you can get elsewhere, and if you are not happy with your existing bank’s offer, move to a cheaper lender.
You should check it before you move, but most banks also offer switching incentives that cover the costs of you moving your mortgage to them.
First-time buyers who want a variable mortgage should make sure to get the cheapest rate they can, and not go with the first one that shows up. Be aware that a reduction in a lender’s interest rate does not necessarily make its mortgages the most affordable on the market. To find the cheapest loan, you should always compare the cost of a mortgage with various lenders. You can easily do this by checking the price comparison website, bonkers.ie, or even better, by getting advice from a professional mortgage broker.
According to Michael Dowling, managing director of the Dublin mortgage brokers – Dowling Financial, it may work out more economical to fix your mortgage, where your interest rate is set for several years than to opt for a variable rate.
“I don’t believe variable rates will fall lower than fixed rates at the moment,” said Dowling. “It is likely that the main refinancing rate will fall by 0.1pc. The only people who will immediately benefit from that will be those on tracker mortgages. I’d recommend that anyone borrowing [to buy a home] looks at a fixed rate rather than variable.”
For example, a first-time buyer borrowing 90pc of the value of their home could get a five-year fixed rate of 2.6pc from Ulster Bank or a fixed rate of 2.8pc from ICS Mortgages, KBC, or Finance Ireland. Right now, the cheapest variable-rate available for such a borrower is 3.15pc.
As things are now, the only problem of locking into a fixed rate today is that a much cheaper variable or fixed rate might become available over the next year or two. When deciding whether to get a variable or a fixed-rate mortgage, you need to take notice which direction interest rates are most likely to be taking in the future.
According to many economists, it is expected that the ECB’s main refinancing rate – which is now at zero – to continue close to, or at this record-low for some time. Any increase in this rate is likely to push up the cost of variable mortgages; the same way that any decrease could see the cost of variable mortgages fall.
Independent economist Alan McQuaid believes an increase in the refinancing rate is still many years away. Austin Hughes, chief economist of KBC Bank, also believes the low-interest-rate environment will continue for at least the next five years.
Both McQuaid and Hughes expect the ECB refinancing rate to be at zero in 2020, 2021, and 2022. Both also believe it unlikely the refinancing rate will be cut further.
So even if the refinancing rate stays at its record low of zero, if it isn’t cut further, the variable rates on offer from the banks may not fall much lower either. So it may make sense to fix your mortgage.
The Government-backed Rebuilding Ireland Home Loan (RIHL) is aimed at first-time buyers who are currently in a situation that they earn too much to be able to qualify for social housing but too little to get a sufficient mortgage from a bank to buy their own home.
Should you qualify, the RIHL is much cheaper than the mortgages available from the banks. The interest rate charged on the RIHL is a fixed rate of either 2pc or 2.25pc. A 30-year mortgage of €250,000 would work out about €45,000 cheaper in mortgage interest under the RIHL than the cheapest variable mortgage available from AIB for those borrowing more than 80pc of the value of their home.
One of the main disadvantages of the RIHL is that you cannot usually shop around for mortgage protection insurance, which repays your mortgage should you die.
The higher the mortgage, the more of a monthly financial burden it becomes. So, one of the best ways to keep the cost of your mortgage down is to buy a property when prices are low. As some economists expect Irish house prices to continue to fall over the next couple of years, if you are a prospective buyer, it might be worthwhile to sit on the fence and see if houses become more affordable in the coming months.
“I expect house prices, as measured by the CSO, to fall on average next year by between 0pc and 5pc, with the biggest drop coming in Dublin,” said McQuaid. “A combination of new supply, a slowing economy, and geopolitical uncertainty (including Brexit) will be the main factors behind this.”
There could be double-digit falls in house prices under a hard Brexit, according to McQuaid. “In the event of a soft Brexit, house prices will be more stable, though I still think new supply and a weaker world economy generally will push prices lower,” he said. McQuaid expects house prices to fall by between 5pc and 10pc in 2021.
Hughes, however, expects house prices to increase by around 2pc or 3pc on average next year “on the assumption of a soft – but not smooth – Brexit.” “I think the economic damage [of a hard Brexit] would inevitably weaken the property market,” said Hughes.
There is also already some evidence that concerns about Brexit are having an impact on Irish house prices. So, a house hunter with a reasonable amount of time on their side might well be advised to sit tight – and to move quickly when the price is right.