GO FOR LOW MORTGAGE RATES, NOT GIMMICKS

Q

My partner and I need to get a mortgage for €280,000 over 35 years to buy a suitable home. Bank of Ireland’s 3% cash back offer is very attractive as it provides money upfront. But how much extra would we pay in the long run for its higher variable rates? With such a big decision to make, we’re also worried that property prices will fall again.

A

It’s very appealing to get 3% of your mortgage back with BoI. Only 2% of this is in cash ‘upfront’ when you take out your mortgage – which works out at €5,600 in your case.

You get another 1% – or €2,800 in your case – only if you stick with BoI for five years. This brings the total on offer to a tasty €8,400.

Other lenders offer cash upfront too from time to time, such as Ulster’s current offer of €1,500. So the net gain from BoI isn’t as big as it seems.

The real catch is that you may have to pay BoI’s very high variable rate of 4.5% (90% Loan-to-value).

And if you do, that will cost you dearly in the long run (see table).

Even after deducting your cash back, you’d still be €42,800 out of pocket.

There is a way to get the best of both worlds, however.

While it has the dearest variable rates, BoI has some of the cheapest fixed rates.

Its three-year fixed rate is 3.45% – slightly lower than the variable rate deals quoted above.

You could fix with BoI for three years, or even five, pocket the €5,600 in cash, and then switch to a cheaper lender when the fixed term is up.

As regards your fears over the property market, they are not unfounded.

But with demand far outpacing supply, no commentators foresee property prices falling any time soon unless there is an economic catastrophe on the same scale as the financial crisis of a few years back.

Another way to look at it is that it costs around the same to build a home on this pricey little island as it does to buy one, often even without taking site costs into account.

So while homes appear dear compared to a few years ago, they are not relative to the cost of building them.

Also compare what you would pay in rent compared to the cost of buying a home.

You might pay a little more to buy now but over the long run you would pay an awful lot more to rent.

The problem with renting is that it goes up every year. Even if it’s just by 4%, the maximum allowed in some areas, this would add up enormously over time due the effect of compounding. Over 35 years you would end up paying as much as €1.06m in rent.

You’d also own nothing. Whereas by the time you pay off your mortgage, you’d own a home worth over €1m at that point (assuming property prices also go up by 4% annually).

Q

My daughter has seen a house she would like to buy here in Ireland for when she returns in the future to live here. She works in Switzerland and lives in a rented apartment with her husband. She has savings of around €40,000. Who in Ireland would give her a mortgage now?

A

AIB and Bank of Ireland said they will consider loans in euros to nonresidents who wish to set up home here in the future. Ulster Bank considers applications from existing customers on a case by case basis. KBC, unfortunately, does not. She should also look into the stringent rules that now apply to mortgage applications. A guide is available on www.citizensinformation.ie.