What a switch! How you can save yourself €54,000 on a mortgage
Borrowers are finally reaping the benefits of competition in the market for home loans
Irish watchdogs and regulators don’t like to name and shame banks. But Friday’s report showing how we can save a year’s wages by switching mortgages goes pretty close to doing just that. It didn’t name any banks but figures used in examples corresponded with those of AIB and Bank of Ireland.
Reading between the lines of the Competition and Consumer Protection Commission’s report, it told borrowers to ignore ‘cash back’ gimmicks from likes of Permanent TSB and Bank of Ireland and switch to the straightforward value offered by AIB’s much cheaper variable interest rate.
And that was before, on the same day, AIB announced that it will slash its mortgage rates across the board – making switching to it even more compelling now.
From tomorrow, AIB’s standard variable rate for existing customers will drop by 0.25% – and loans for new customers by 0.35%.
Its rates now range from just 2.75% for 50% loans to 3.15% for variable loans above 80% of the property value. Those are the lowest mainstream mortgage rates I have come across in my career.
Mortgage broker Michael Dowling said AIB’s move is ‘very welcome and the variable rates offered are the cheapest on the market’.
He said: ‘The fixed-rate adjustments bring AIB in line with the competition but its seven-year rate of 3.5% is interesting as it is the first long-term fixed rate under 4%.’
As AIB’s fifth rate decrease in the last three years, ‘it proves the benefit of having best variable rates rather than the cash back deals from Bank of Ireland and PTSB (which have much higher variable rates)’.
The potential savings on switching a €300,000 loan from BoI to AIB is now around €54,000, even including the cash-back deals that dearer lenders rely upon to entice customers. That’s after-tax income. A single person would have to earn €85,000 before tax to come out with that kind of money!
Yet hardly anyone bothers to consider switching mortgage, let alone actually doing it.
Only 6% of mortgage-holders considered switching their mortgage provider, new data shows. And only 2% actually switched, according to the Competition and Consumer Protection Commission.
The search for value shouldn’t ‘stop after you get your first mortgage’, said Áine Carroll of the CCPC watchdog.
‘Saving money each month over the course of a mortgage can add up to a life-changing sum.’
Yet CCPC’s research shows that almost half of mortgage holders ‘don’t know the rate they are paying’.
Borrowers are put off by the complexity (38% of people), paperwork (48%) and upfront costs (20%) involved in this process, according to the CCPC.
The time involved is another turn-off for 35% of people.
Yet a few hours of form-filling really isn’t that much work if you can save a sum greater than your
salary – that is, the amount it takes you all year to earn!
Using the CCPC’s comparison tool on its website, you could save €170 a month over 25 years – or €50,000 in total.
The watchdog released a study based on an example on a €250,000 home loan on a property worth €350,000, excluding cash-back deals.
In its report, the CCPC doesn’t ‘name and shame’ the dearer lenders it exposes.
But it’s not too hard to work out who the culprits might be based on the figures, which mirror Bank of Ireland’s standard rate.
The cheaper banks reflect the rates of both AIB and Ulster Bank.
However, the CCPC report is slightly out of date as on the day it was released (Friday just gone), AIB announced it is to slash it’s mortgage rates by up to 0.35%.
Without naming Bank of Ireland and PTSB, the CCPC appears to issue more veiled criticism of the pair by noting that ‘many mortgage lenders are now promoting special offers, such as upfront cash when you take out the loan’.
It said it ‘is warning consumers not to be distracted by the lure of cash, but instead to focus on the long-term cost of the mortgage’.
‘Choosing a mortgage based only on a cash-back offer may cost consumers thousands of euro more in the longer term,’ the consumer watchdog warns.
The CCPC uses another example of a €300,000 loan over 25 years.
It mentions Lender A (which it doesn’t take a genius to work out is Bank of Ireland), which is offering upfront ‘cash back’ of 2% of the loan.
Lender B offers a lower rate and no special offer. Again the rate offered by B had corresponded with AIB before it announced its major cut, which takes effect from tomorrow.
I’ve updated the CCPC table in the light of the AIB cuts to show the true cost of both options in the report (see table above left comparing A and B).
So while it’s tempting to take the cash-back offer over the lower rate, doing so would cost you at least €54,000 over the term of the mortgage with a 3% cash back deal – or €57,000 with 2% cash back.
BoI would also point out that its fixed rates match AIB’s new rates 3.2% over three years, for example.
There’s nothing to stop its customers taking the cash and opting for a fixed rate that’s much lower than the variable offering.
And the bank may well yet cut its rates in response to AIB’s aggressive move that has thrown down the gauntlet to rivals.
At last, we now have real competition in the mortgage market!