Key Post How to go about choosing a mortgage

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Brendan Burgess

Brendan Burgess

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How to choose the best mortgage

Thanks to Sarenco and Red Onion for clarifying a lot of these issues - but the opinions expressed here are my own.

Note: This is based on rates and conditions as of August 2017. The mortgage market is dysfunctional at present and a normal decision making process does not apply.

As of August 2017, you should fix your mortgage rate for three reasons

  • Fixed rates are a lot cheaper than variable rates (They should be higher but that is the way the market is.)
  • If mortgage rates fall, you will be able to break out of the fixed rate and move to the lower rate. You will have to pay a break fee, but this fee will probably be very small or even nil for anyone fixing now. Even if it's too expensive to break, the rates at which you can fix are still a lot cheaper than variable rates.
  • If mortgage rates rise, you will benefit from having fixed.
You should probably go for a cash-back deal

In a normal market, one would expect that the cash-back deal would result in much higher rates, but in this dysfunctional market, they are only a bit higher

You are still free to switch to another lender at any time – the lender cannot reclaim the cash-back. (In practice, another lender probably will not take you on for at least a year.)

Review your position after one year

After one year, you should be able to switch to another lender by paying a break fee. (Of if you fix now for just one year, there will definitely be no break fee.)

We don’t know what the market will be like this time next year, but this is what I expect:

  • Cash back deals will be limited to around €1,500 to cover the legal costs
  • Variable rates will be lower
  • Fixed rates won’t be much different

It will probably make sense then to switch to a variable rate. But who knows? The market may still be dysfunctional.

Review your position when your loan to value falls below 80%

Rates for mortgages with an LTV of less than 80% are usually much lower than for those above 80%. So if your LTV falls because the value of your house has risen or because you have paid off capital, ask your lender for a lower rate and consider switching your mortgage to another lender.
 
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“But I don’t want a fixed rate mortgage as I may want to make a capital payment or overpay my mortgage”

There are a few options open to you

Your lender may allow you to make some capital repayments without penalty. For example, I understand that Bank of Ireland allows borrowers to repay up to 10% of the mortgage each year without penalty. (Anyone got a link for this?)

It may be worth splitting your mortgage into part fixed and part variable, so that you can repay the variable element without having to pay a fee.

You can repay part of it early and pay a break fee. It is not expected that the break fees will be high for someone fixing now.

“But why not fix now for 5 years or, even for ten years?”

You could fix with Bank of Ireland for 5 years at 3.35% instead of two years at 3.2%.

It would cost you an extra €300 per year on a €200,000 mortgage

Or €1,500 over 5 years.

At the end of the 5 years, BoI will refund you 1% of the amount borrowed or €2,000

The ten year rate is 4.2% which is way too high.

“But I have better things to be doing than worrying about my mortgage – which bank treats its customers best and offers the best long-term value?”

In general, I would say that AIB is the best long-term bet:

  • Their variable rates for new and existing customers have been close to the lowest rates in the market for some time.
  • They pass on rate cuts automatically to existing customers and new customers alike
  • Their Standard Variable Rate is 3.4% compared to 4.5% for Bank of Ireland and permanent tsb, 4.3% for Ulster Bank, 4.1% for KBC.
  • They don’t use gimmicks to attract customers.

But unfortunately, AIB’s fixed rates are way too high and, at the moment, fixing seems to be the right idea. Fixing with AIB for three years at 3.65% without any cash back is just not the best choice, when you can fix with Bank of Ireland for 3.2% and get 2% cash back.

Ulster Bank also passes on rate cuts to existing customers and they also allow existing customers on variable rates who reduce their Loan to Value to move to a lower rate, (which AIB does not allow). They have a fixed rate of 3.2% for amounts of €200k plus and €1,500 cash back vs. the same interest rate and €4,000 cash back from Bank of Ireland.

Bank of Ireland has very competitive fixed rates, but they boast about keeping their variable rates high to encourage people to fix. That may be the right decision now, but it’s not usually the right decision.

KBC has offered competitive rates to attract new business, but then has not passed on rate cuts to existing customers. It has changed its policy recently to allow existing customers to apply for the rates on offer to new customers, but most customers don't know about this or don’t bother to change, so they end up paying much higher rates than they would be paying had they chosen AIB.

Permanent tsb is the worst offender of all. It charged 6.25% SVR when other lenders were charging 3% and 3.25%. It continues to discriminate between new and existing customers. It is definitely a lender you do not want to be stuck with.
 
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Let’s apply these principles to a First Time Borrower, borrowing €200k at 90% LTV.


upload_2017-8-3_14-20-58.png


Note, for simplicity, I have not included all rates. I have excluded those which are clearly inferior to other rates on offer e.g. AIB's fixed rates and BoI's variable rates.

The fixed rates are much lower than the variable rates for most lenders e.g KBC 2.9% vs. 3.5%, so it’s clear that you should fix.

It looks like the Best Buy is Bank of Ireland fixed for three years at 3.2%. That is cheaper than their 1 year rate and it is also cheaper than their 5 year rate. The 2% cash back brings the effective rate over three years down to 2.53%
 
Oops

I had explained them in an earlier version



upload_2017-8-6_14-41-48.png


Take BoI 3 years fixed

The 2% over three years is worth .67% per year.
So the effective rate is 3.2% -.67 = 2.53%

Brendan
 
Thank you Brendan, very useful. Awaiting your advice for 80%LTV borrowing 300k, thank you very much.
 
Hi,

I am looking to switch my mortgage but am a tad confused about which way to go. Here is my current situation:

Provider: EBS
Type: variable
Rate: 3.5%
Mortgage outstanding: €179500
Term outstanding: 29 yrs
Property purch price: 245k
Current property value: not sure but similar selling in my area for €290k

Which provider is my best option to switch to?

Thanks,
Jim
 
sagar85 said:
Thank you Brendan, very useful. Awaiting your advice for 80%LTV borrowing 300k, thank you very much.
Click to expand...

Hi sagar and others. Sorry, I had missed this.

I have inserted a new table for less than 80% LTV

upload_2017-8-30_16-54-40.png


It seems to me that the best option is to fix for three years or 5 years with Bank of Ireland. Or fix with Ulster for 4 years.

Brendan
 
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Jim

Your LTV is 62% , so you fall into the <80% category, so the above table and conclusions apply to you as well.

However, if you get your mortgage down to €174k, then you would qualify for the <60% rates.

Alternative, if you can get a valuation of €300k, then you qualify now for the <60% rates.

So you should read the 60% table, which I have not completed yet.

Brendan
 
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