Ireland: Weigh up new mortgage deals

Brokers report fixed-rate products are particularly popular in the remortgage market.

“The number of mortgage holders (including recent first-time buyers) contacting us for advice on their existing mortgage has increased dramatically since the start of the year,” said Clare Doran, the marketing manager of IFG Mortgages.

“We are reviewing mortgages just three or four years old. As the cost of living increases, clients feel the pressure and look for ways to reduce their monthly outgoings. We now find that the vast majority are selecting fixed rates for one, two or three years.”

Opting for a fixed rate is not the only alternative and borrowers should examine trackers and other mortgage deals. Before making a decision, compare monthly repayments and the total interest paid over the life of the mortgage and examine your financial situation, taking into consideration special savings incentive account (SSIA) payouts and other future income and outgoings. “For example if you have credit card debts, now could be a good time to consolidate them with a remortgage with a view to paying a chunk off the mortgage when the SSIAs mature,” said Sarah Wellband, an associate director of REA, a mortgage intermediary.

Tracker mortgages

These are mortgages where the interest rate tracks the ECB rate and adds 0.95 points or more. They are the best value option for borrowers who qualify. Eligibility for tracker rates often depends on the loan, with many institutions not giving trackers to those borrowing less than €200,000 or €250,000.

Anybody still paying the standard variable rate on their mortgage should look into trackers. “People who took out mortgages four or five years ago had to opt for a standard variable rate if they did not want to fix,” said Wellband. “Tracker rates were not available then so anyone paying a standard variable rate now should go to the bank and say, ‘I am a long-standing client and I want the best rate you have available’.”

For example, the AIB standard variable rate is 3.81%, but it offers lower tracker rates of 3.5% for properties where the loan-to-value (LTV) ratio is less than 60% and 3.66% for LTVs over 60% when the loan is for €250,000 or more. (These rates have not yet been adjusted following the most recent ECB rate rise.) Somebody with a mortgage of €200,000 on a house worth €350,000 would pay €1,034.17 a month on the AIB rate of 3.81%, with total interest payments over 25 years of €110,252. If they switched to the lower tracker rate of 3.5%, the monthly repayment would fall to €1,000.72 and the total interest paid over 25 years would drop by €10,000.

At the moment, Bank of Scotland (Ireland) is offering the best deal for those taking out a mortgage with an LTV of 75% or less, according to Wellband. “The Bank of Scotland (Ireland) discounted tracker gives a rate of ECB plus 1 point for the life of the mortgage, but there is a discount of 0.55 points on the rate for the first two years, which brings it to 3.2% at the moment. This is a good deal for purchasers,” she said.

Ulster Bank also has a competitive rate of ECB plus 0.95 points when a mortgage has an LTV of 60% or less. A tracker deal worth watching for those concerned about interest rate rises is the IIB capped tracker mortgage. The rate is ECB plus 1.25 points, but there is a guaranteed cap of 4.99% on the rate over the next three years.

Although trackers offer the best value at the moment, Tice O’Sullivan, a financial adviser with PrimaFinance.ie, a multi-agency intermediary, urges those who are worried about their ability to keep up repayments in a higher interest rate environment to be cautious.

“Trackers are suitable for those with a low LTV, but affordability is another consideration,” he said. “If borrowers feel nervous about rates, we recommend they get a fixed rate deal. It can also depend on their circumstances. If they are planning on selling their property soon or they are going to come into money, we would recommend they go for the tracker.”

Fixed rate

If the thought of further rate rises leaves you in a cold sweat, it may be worthwhile opting to fix your mortgage rate. Although your repayments will rise in the short term, they will remain the same for the fixed period. So if interest rates shoot up, your repayments will be lower than the tracker alternative. Furthermore, you can budget more effectively knowing how much your repayments will be.

The lending institutions are in the process of increasing their rates since the recent ECB increase, so it is difficult to compare all fixed-rate offerings. O’Sullivan points to Bank of Ireland, which has upped its rates, as one lender that should come through as competitive. Its rates were increased by 0.2 points rather than a quarter point last week. Its two-year fixed rate is 4.59%, with the three-year fixed standing at 4.69%.

Fixed-rate products have their drawbacks. Interest rates may not continue to go up over the long term, so borrowers could be stuck making unnecessarily high repayments, as happened to many people when rates last fell. Fixed-rate borrowers usually can’t make ongoing or one-off lump sum payments and they will have to pay a break fee if they want to exit the loan before the fixed-rate period is up.

Instead of opting to pay the higher amounts demanded by fixed-rate products, Wellband suggests making provision for higher interest rates in a different way.

“What I would suggest to people is to figure out what their repayments would be if rates move upwards and save the difference between their current repayment and the higher one. For example, if you would be paying €1,250 if rates went to 5% but you are paying only €1,000 now, put €250 a month into a nest egg that you can use to subsidise mortgage payments if they go up in future,” she said.

Hedge your bets

Borrowers can hedge their bets by trying to marry the flexibility of a floating rate and the peace of mind offered by a fixed rate. “It is possible to split the mortgage into a portion that is fixed and a portion that is variable,” said O’Sullivan.

“This strategy is suited to people who understand that rates are probably going to go up but might have the ability to overpay or pay down mortgage a bit, so they want to have part of the mortgage on a variable rate so they can do that.”

He admits it can be difficult to persuade lenders to arrange mortgages on this basis, but points to AIB and First Active as lenders that tend to be flexible in this regard.

“They can all do it, but some of them might issue two offer letters and require two direct debits to be set up.”

O’Sullivan gives the example of a 30-year mortgage of €250,000 on a property worth €312,500. If this loan were split 50-50 between the EBS variable rate and the EBS fixed rate, the monthly repayment would be €1,239. This is based on half the loan being made on the variable rate of 3.75%, which would require a monthly repayment of €579, and half on the three-year fixed rate of 4.85%, giving a monthly repayment of €660.

If the entire loan was on the EBS three-year fixed rate, the repayment would be €1,320 a month. On the other hand, if the borrower opted to take the EBS tracker rate of 3.8% (ECB plus 1.05%), repayments would be €1,165 a month.

HUNT FOR FLEXIBLE LENDER NETS €465-A-MONTH SAVING

CAITRIONA BUDHLAEIR is laughing all the way to the bank. The 36-year-old university administrator is switching mortgage providers and will pocket an extra €465 a month, or €11,160 over the first two years of the new loan. With newborn baby Roisin in the house, the spare cash will come in very handy, she said.

“I took out my first mortgage, for €170,000 in August 2000 when I was buying a house with my husband. I was a first-time property buyer and found the mortgage maze a little daunting. We took out the loan with EBS and bought a three-bedroom end-of-terrace house in Donnycarney.

“We chose EBS because we felt more comfortable with a mutual building society. My husband also knew a friendly branch manager, who was more than happy to facilitate us. The mortgage was a standard 25-year annuity, fixed for the first two years at 6.1% to give us initial certainty, even though we knew we would probably be paying over the odds.

“In 2003, we took out a €15,000 top-up loan to help complete a substantial renovation of the house, including moving the toilet upstairs and installing a new kitchen. Last year, we decided to build a big extension and applied for a further loan of €150,000. This brought our total loans outstanding to €300,000, having paid off €20,000 of the principal by this stage.”

Although EBS agreed to top up their mortgage, the building society refused to consolidate their top-ups and loan with their existing mortgage. The company also refused to allow a switch to a tracker product, saying it was not the society’s policy to recognise top-up loans as part of the mortgage.

Budhlaeir and her husband decided to shop around for a more flexible lender that would allow them to consolidate at a competitive rate. They approached REA, a mortgage broker, and settled on a 25-year annuity from Bank of Scotland.

“We found Bank of Scotland very accommodating, particularly given that it paid €1,000 towards switching fees and had an introductory two-year offer that we felt was well worth taking up,” Budhlaeir said.

“Bank of Scotland was surprised that our request to consolidate had been turned down by EBS and it was only too happy to help us. We’re thrilled with the outcome. That extra €465 a month — adding up to €5,580 could buy us a luxury holiday every year.”

Fiona McGoran