You’re in the market for a house, you do your sums and work out you can afford a certain amount. You bid, are successful, and get the keys. Maybe you feel you’ve paid too much, but you’re happy in the end. It’s yours.
But what you may not realise is that the price you’ve paid for your house is only the cash price; if you need a mortgage to buy that property the amount you end up paying for it is going to be substantially different.
After all, what you actually pay for a home depends very much on how much you’re paying to finance it. Just like that couch or television, or PCP deal, getting finance to purchase a property can add a significant cost.
Of course, most of us would never be in a position to buy a property up-front – despite everything we hear these days about cash buyers flooding the market – so getting finance is essential. However, it’s worth bearing in mind:
a) the total cost to you, and;
b) the ways you can try and keep these financing costs in check.
Cash is king
When you look at the figures in our panel, one of the reasons why there has been such a rush to buy property with cash becomes clear; it’s cheaper to buy it this way.
Economists suggest almost one in every two sales are still being funded with cash in the Irish market. This can save buyers hundreds of thousands of euro thanks to having no interest bill on their finance.
Of course, the big cost to investors or homebuyers buying with cash can be the “opportunity cost” of putting their money into a property rather than spending or investing it on something else. However, with deposit rates still on the floor making this decision may have been easier of late.
But for so many of us, buying a property with cash is only a pipe dream.
Why interest rates matter
Buying a house often requires a gargantuan effort: bidding, being disappointed, revising your expectations downwards, bidding again, and again, and, finally, ending up spending much more than you ever thought you would have to.
Getting the finance, however, while tricky in itself, is often more about securing an amount. But what about if you expended a similar amount of effort in securing the most favourable terms?
While not as important as the price of the house, the price of the finance will have a big impact on just how much it will actually cost you at the end of the day.
This would be easier if banks were obliged to be upfront about the total potential costs of finance over a 20-30 year term, by setting out early in your mortgage approval just how much the property will cost you. Just like we’ve done in the adjacent panel.
It might help competition by encouraging homebuyers to buy the “cheapest house” by opting for the cheapest provider.
Consider the purchaser of the €425,000 house in Rathfarnham. By opting for a fixed rate at 3 per cent with Bank of Ireland, this house is going to cost them €623,049 (note this figure is just a guide as rates will change over the period of the loan) based on a 10 per cent deposit. That’s a staggering 48 per cent more than what the person thinks they have paid for it.
But what if they had gone with Ulster Bank’s market beating rate of just 2.3 per cent? They would have saved themselves about €62,000.
On the other hand, if they had opted for a variable rate of 4.2 per cent with Permanent TSB, the house would cost them €715,876 – or an extra €150,000, money which could no doubt have been better spent on renovating the house, paying down the mortgage, raising a family or in any number of other ways.
A bigger deposit
Getting the lowest rate is one way you can save money. Another is to borrow less. The more you can reduce the amount you have to borrow, the cheaper your home will end up being. This is because you’ll have less capital outstanding on which to pay interest.
Look at the examples in our panel. On the house in Cork, our homebuyer would have saved themselves about €14,000 in bank interest over the life of the loan if they could have come up with a 20 per cent downpayment.
And the more you owe, the greater the savings can be by borrowing a lower amount. In the example of our €1 million+ house in Castleknock for example, our borrower would have saved themselves €90,611 in extra interest repayments if they could have paid a 20 per cent deposit as against just 10 per cent.
With deposit rates on the floor, if you do have sizeable savings it might be worth considering putting more into your home purchase than you might have otherwise done, provided, of course, that you still have enough in your rainy day fund.
Putting more into your property upfront also means lower monthly repayments. But if you can afford it you can supercharge your repayment ability by adding this difference to your mortgage repayment, as we will see below.
A shorter term
Another way of achieving savings is by compressing the length of time over which you must repay your loan.
On a 30-year term our Cork homebuyers will have monthly repayments of €1,005.53 on their three-bed semi-d, and a total interest bill of €123,489. If they could afford a higher repayment, however, of €1,322 a month, they could cut the term to 20 years, and in doing so they would see their total interest bill shrink to €78,951 – and they would have the loan paid off 10 years earlier.
Even going halfway, to 25 years, would see the interest bill drop to €100,798, with five years shaved off the term. The trade-off would be an extra €126 in repayments each month.
No missed payments
No, we don’t mean missing because you can’t pay, but rather missing because you want to buy nice furniture or go on a big trip.
Many of the banks have once again started allowing borrowers to take a moratorium, or break, from their mortgages. AIB, for example, will allow you to take a break for a period of up to six months, while Bank of Ireland allows you to take a three-month payment break up to three times over the life of your mortgage.
While this can offer some much-needed flexibility at times of financial duress, such as the arrival of a new baby or redundancy, you should think twice about availing of it for a holiday or other discretionary item as it will add to the overall cost of your home.
Upping payments
Yet another way to bring down your overall cost of funds is to increase the amount you repay each month.
If our Cork homeowners made one extra mortgage repayment each year (of €1,005 – or some €30,150 over the life of the mortgage), they would cut their interest bill by almost €20,000 – and reduce the term of their mortgage by 3½ years, so saving a further €42,000 or so in repayments.
Another approach is to spread that extra payment over the course of a year. In this case adding €83.75 to the repayments each month will have a similar if slightly less positive outcome as you will have your mortgage for one month longer.
Yes, it won’t be an option for everyone, but even once-off payments, when you might have some spare cash, can make a difference.
For example, if the owner of the house in Cork made one €10,000 payment during the 30-year term of their mortgage they would end up cutting almost two years off the term of their mortgage.
One difficulty in this approach is the move to fixed rate mortgages. Central Bank figures show that the majority of new loans – 63 per cent – are now on fixed rates as the banks have been astute in offering their best rates on these product types.
Typically, when you fix you are not able to overpay your mortgage. However, most banks will now allow you to overpay up to a certain level without risking breakage charges. Bank of Ireland, for example, will allow you to overpay either €65 a month, or 10 per cent of your repayment, whichever is greater, while Ulster Bank also allows you to overpay 10 per cent each month.
And if it’s becoming expensive to overpay simply save the money yourself and pay it down against your mortgage when the fixed term ends.
Any way you look at it, there’s a lot more to buying the house than agreeing the upfront purchase price.
How much do these homes really cost?
[ Springvale, Rathfarnham, DublinOpens in new window ]
Cash price: €425,000
Price with down payment of 10%: €623,049
Price with down payment of 20%: €601,043
[ Glanmire, Co CorkOpens in new window ]
Cash price: €265,000
Price with down payment of 10%: €388,489
Price with down payment of 20%: €374,768
[ Castleknock, DublinOpens in new window ]
Cash price: €1,750,000
Price with down payment of 10%: €2,565,495
Price with down payment of 20%: €2,474,884
* Based on 30-year mortgage at 3 per cent and assumes rates stay level over the period of the loan.
