Switching your mortgage can seem like a pain. It was hard enough to get it in the first place, right? But if new lower fixed interest rates mean about €200 more in your wallet, you'd be mad not to. Especially if that's €200 every month.
The arrival of Avant Money is bringing some real competition to the Irish mortgage market. Backed by Spanish bank Bankinter, it is offering a market-leading 1.95 per cent fixed mortgage rate to owner occupiers with a deposit, or existing equity, of 40 per cent or more of their loan. If that's you, the monthly savings could be substantial.
What’s to celebrate? Irish mortgage holders pay the third highest interest rates across the euro zone, so it’s certainly not that. In August, the average interest rate of all new mortgages agreed here stood at 2.83 per cent. That’s 1.48 per cent higher than the euro area average.
That may not sound like a lot, but depending on your loan, your mortgage could be costing you hundreds of euro more a month than your European neighbours.
Banks here have been slow to budge on mortgage rates. However, there have been flickers of competition in the fixed space in the past year. Borrowers are voting with their feet and now fixed rate mortgages, including renegotiations, account for 77 per cent of all new mortgages taken out.
But Avant Money has thrown some petrol on the fire and borrowers are the likely winners. AIB has been first to respond with a cut of up to 0.2 of a percentage point on all its fixed rate mortgages. Others may follow.
Who is it for?
If you were to draw a picture of who will benefit most from Avant’s rates, it’s likely the comfortable middle aged. With the company targeting buyers and switchers with loans that are 60 per cent or less of the value of their house, they will be customers who have either had their mortgage a while or they are buying with a chunky deposit.
"They are typically couples in their 40s or they are single. They would have borrowed for their houses when they were 28-32," says Trevor Grant, of Affinity Advisors and chairman of the Association of Irish Mortgage Advisors.
So it’s people like married couple Seán and Breda, or savvy single Sinéad. Avant won’t deal with those buying to let or to self-build, they only want to talk to those borrowing for their own home.
The lender is offering mortgages in specific areas only – Co Dublin or within 30km of its border, Cork or Galway cities or within 30km of there, or in or within 20km of Limerick or Waterford cities.
Take Seán and Breda in Wicklow. They owe about €295,000 on their home. Life is busy with work and kids and they couldn't tell you what they ate for breakfast, never mind what mortgage interest rate they are on. Well, it's a 3.5 per cent variable rate with monthly repayments of €1,773, for the next 19 years.
Opting for the three, five or seven-year fixed rate of 1.95 per cent would result in a monthly saving of €224. That could be a nice addition to the college fund.
The next best deal for them as switchers would be a three-year fix with KBC at 2.25 per cent. KBC throws in 25 per cent off home insurance and €3,000 cash back to borrowers switching to them. However, after just 14 months with Avant, Seán and Breda will have made more than that €3,000 in savings.
And you’ll almost certainly get a better deal on house insurance from anyone but your bank.
Sinéad in Cork has an outstanding balance of €241,000 on her home, with 14 years remaining on the term. She is no stranger to fixing and her current fix of 3 per cent is expiring in three months. If she switches to Avant for a three, five or seven-year fix, her monthly payments will drop from about €1,758.57 a month to €1,640.39.
That’s a saving of about €118 a month. Sinéad could add that to her pension.
You might think, if there really was a better rate, my bank would tell me. That’s not how it works, says Grant.
“I had three particular calls last week where the customer was on high variable rates. Their bank would give them a lower variable rate or a lower fixed rate if they asked for it, but your bank isn’t going to contact you to offer a lower rate. Those customers were in the dark.”
If you want a better deal, you have to do the work yourself.
First-time buyers
Avant is offering some other rates too, but these are broadly in line with those of existing lenders. If you have a loan to value of 80 per cent, or a 20 per cent deposit as a first-time buyer, you can get a rate of 2.2 per cent fixed for three or five years from Avant.
This still beats KBC’s offer to its current account holders of 2.3 per cent and 2.45 per cent respectively. First-time buyers borrowing 70 per cent or less can get a rate of 2.1 per cent for a three or five-year fix.
But for first-time buyers borrowing more than 80 per cent of the value of their home, the lowest rates from Avant are 2.35 per cent over three years or 2.5 per cent over five years. Fix for two years with KBC or Ulster and you’ll get a lower 2.3 per cent rate.
Move it
Whether it’s lethargy or loyalty, fear or loathing, too few of us switch mortgage. We assume that it’s too hard, that the savings probably aren’t that much, or we may even harbour some loyalty to our lender.
Switching is not that hard, the savings can be substantial and your loyalty is most certainly misplaced. Lenders sure don’t reciprocate and you are likely paying a price for it.
Last month KBC, "the bank of you" as the tagline of its advertising campaign says, was fined €18 million by the Central Bank for devising a strategy specifically to move homeowners off cheap tracker loans.
In May, Permanent TSB was fined €21 million for "unacceptable harm" it caused its customers. Their advertising tagline is "permanent support". AIB ("backing brave"), EBS ("the mortgage masters"), Bank of Ireland ("a mortgage as personal as your home") and Ulster Bank ("help for what matters") all remain under investigation as part of the tracker scandal. So don't feel bad about switching.
It’s been a long time since borrowers here have seen rates as low as 1.95 per cent – probably as far back as pre-crash tracker-land.
If you do switch, no matter to what bank – or even to a new rate within your current lender – history tells us to keep a clear, written record of everything agreed.
The advantage of a fix is that your monthly repayments will stay the same until the fixed period ends. If rates go down, that means your payments won’t drop.
With a variable interest rate your repayments can go up and down. However, there is no obligation for banks to lower rates in line with European Central Bank moves. Similarly, they do not have to raise rates when the ECB does though you wouldn't want to bank on any such reluctance. You usually get more flexibility to pay extra money off the loan, extend the term or top it up without penalty under a variable rate. Ask all these questions before fixing or switching.
Lower rates
If you are an existing mortgage holder keen on the new, lower rates, call your lender first. Find out what your current mortgage rate is, the outstanding balance, the remaining term and confirm your monthly repayment.
You’ll need an idea of how much your house is worth too. You’ll find local values on propertypriceregister.ie. If the value of your home has risen since you borrowed, the loan-to-value balance will be in your favour.
Using this information, the mortgage switching calculator on the Competition and Consumer Protection Commission website will tell you whether you are paying over the odds.
If you save most by fixing with your current lender, you should factor in the cost of getting your house revalued. This ranges upward from €140.
If there is a better rate with another lender, you’ll need to pay some legal fees. Shop around for a quote. Fees range from €1,500. Some banks offer a contribution towards switching fees (Avant doesn’t), but do the sums. You might save more in the long term by going with a lower interest rate whilst paying the fees yourself. If all this seems too complicated, use a broker.
If you’d like the flexibility to overpay, Avant’s limit of 1 per cent of the loan amount every year may not suit. “If I was to pinpoint drawbacks, the first is the lack of contribution to switching and the second is overpayment – 1 per cent of your loan amount is not a lot,” says Grant.
If you’d like to switch, but are already locked into a fix with another bank, all is not lost. Call your bank and ask them to issue you with a letter stating your break fee. Weigh this up over the savings to be made.
"In a lot of cases the break fee is zero, or very close to zero," says Joey Sheahan of mymortgages.ie. "The cost of funds to banks is currently so low. We are seeing a lot of people breaking out of fixed rates and switching."
If there is a penalty however, Avant, unlike other lenders, won’t contribute financially to your switch.
Loss of income
Not everyone who meets Avant’s criteria, or those of other banks, will be able to switch. It’s essentially treated as a new mortgage application. Dual income couples where one career is now paused, or those whose income has been hit by Covid-19 may not qualify.
“It’s your income now, not when you first took out the mortgage [that counts],” says Grant. If your income has dipped, it’s still worth checking out a switch. The size of the loan and your equity count too.
If you live far away from a city, hold tight. Having dipped a toe in the market, Avant may lift their slightly arbitrary geographical limits, especially with a seeming flight of home workers to the countryside. All the better for competition in the mortgage market.
