It was the most unwelcome of Christmas gifts: another interest-rate hike, to add to the several announced during 2022, and the threat of more to come as we enter 2023.
Rampant inflation, high demand and an increased cost of buying all feed into mortgage holders’ woes. While not all banks passed along the soaring rates to all customers, there’s no doubt that the era of very cheap money is over.
It was, according to Daragh Cassidy of comparison website Bonkers.ie, a ‘nightmare before Christmas’.
“Since July, the ECB has raised rates by 2.5 percentage points”, he said. “However, AIB only hiked its fixed rates by one percentage point, PTSB has hiked its fixed rates by an average of 0.45 percentage points, and BOI has hiked its fixed rates by just 0.25 percentage points”. But, he added ominously, “It’s hard to see this remaining the case for much longer”.
Joey Sheahan of online broker MyMortgages.ie said: “On its own, the 0.5 percentage point December 2022 rate hike will easily add another €600 a year to the mortgage bills of a homeowner on a 30-year tracker mortgage of €200,000 from this month.
“The ECB rate now stands at 2.5pc, up from the zero rate that it stood at before interest rates started to rise in July. Mortgage repayments are costing the borrower €3,000 a year more than they did before July 2022”.
For anyone still with years to run on their biggest outgoing — their home loan — there is an opportunity to see if you can do better elsewhere.
Mr Sheahan said there was already evidence of this last year, as borrowers got antsy with the market. “Bank exits, ECB rate hikes, and subsequent lender hikes have all, undoubtedly, spurred people into action. Though the cost-of-living crisis too can be credited with growing numbers of people looking to see if and where money can be saved on their household expenditure.
“But there are many who haven’t yet switched and so our advice continues to be that if you haven’t re-fixed or switched your mortgage last year, you should immediately look at your options today — regardless of whether you’re in a fixed or variable rate contract now”.
“Most borrowers don’t know that in many cases, you can break a fixed rate with no fee and switch to a lower-interest mortgage rate with the same or another bank. We cannot stress enough the urgency of switching for thousands of mortgage holders throughout the country,” Mr Sheahan explained.
“We should all be doing what we can now to stabilise our finances where possible and as a mortgage is most people’s largest regular outgoing, reviewing your interest rate is the most obvious place to start.”
Anyone who has ever completed a mortgage application may baulk at the process. But there will never be a more enticing catalyst than seeing more of your money disappear every month.
‘Most borrowers don’t know that in many cases, you can break a fixed rate with no fee and switch to a lower-interest rate’
Liam O’Connor, sales director with Irish Mortgage Corporation, is also seeing an uptick in switchers, even the heretofore unthinkable move of tracker customers to fixed rates.
“It’s a huge change, and a lender would have concerns over the implications of taking a tracker rate off customers, but fixing for a period of time brings certainty that’s well worth considering,” he said.
He added that the fixed-rate market has developed significantly. “Two, three years ago the maximum fixed rate period was five years. Now, there’s a range of seven, even 10-year products”, a situation he said will continue, despite one lender, Finance Ireland, discontinuing some longer-term products.
“Avant, for one, has considerable support from Spanish underwriter Bankinter, and isn’t as exposed to the bond market as Finance Ireland or ICS”, said Mr O’Connor, referring to two other non-bank lenders which have been chomping their way through the switching market for a few years. If you can fix for the full term at 3.5pc, I think that’s fantastic value for money, especially with the ability to overpay at a certain amount per annum.”
Daragh Cassidy added: “Tracker customers, especially those paying a margin of 1pc or less, can take some comfort from the fact their rates are still relatively competitive. A good number would have ported their tracker as they traded up, with existing lenders too, and could now be paying on margins of 2.5pc”.
Moving off that “really depends on a person’s particular needs”, said Liam O’Connor. “If you’re comfortable to ride out the storm, then stick with what you have. A tracker margin is a valuable margin. But if you want certainty around the biggest financial purchase you’ll make, then look at switching”.
To switch, or not to switch
The argument for switching
Switching is quicker business, from a lender perspective. A first-time buyer is riskier. They may not close, whereas a switcher is already a home owner and, to a large extent, effectively pre-approved. The savings, over the life of a mortgage, are enormous. The higher the loan, and longer the term, the better you will do.
The argument against switching
Rates could still rise with your new lender, so there are no guarantees you’ll get better value. But fixing while the storm is raging at least gives knowledge and certainty of outgoings. It will take time, and plenty of research and paperwork.
After cherry-picking their way through the market over the last few years, the non-bank lenders (NBLs) found that accessing cheap money was going to be harder last year. More sensitive to interest-rate increases, their customers found that out too.
“ICS capped loans at 2.5 times income. Finance Ireland are offering rates in the 5pc range”, said Mr O’Connor. “What we are seeing is predominantly the pillar banks, every 1pc rate is worth €300m to their bottom line, which is pretty substantial for these lenders and they can suck it up a little better”.
Customers of NBLs and equity funds fall into two categories: those who ended up in arrears and were bundled and sold off to Pepper or Mars or another of the funds now managing their account. They may have no alternative to the now fast-rising interest rates.
But Mr O‘Connor said there is a second cohort to do. That’s the former customer base of Irish Nationwide, Bank of Scotland, Dansk or any long-departed former lenders. “They never missed a payment and simply got moved. There may be no fixed-rate options with their current provider, but if they have a clean repayment history, it would be opportune to speak to a broker and they’ll be told very quickly if they can switch elsewhere”.
What you need to know about switching
CURRENT MORTGAGE: In most cases, you will need to have had your current mortgage for a minimum of 12 months before switching. However, it’s worth speaking to your lender as they may allow you to switch sooner.
EQUITY: You will need to have a minimum of 10pc equity in your home. This is subject to meeting affordability and credit policy requirements with the proposed new lender.
LTV: If your loan-to-value (LTV) ratio is greater than 90pc then you will not be eligible to switch your mortgage.
COSTS: Include valuation fees and legal fees in your budget.
CASHBACK: Some lenders will offer you cashback as an incentive, which you can use towards associated costs — but check you’re not paying higher interest for them.
PAPERWORK: You will require three months’ payslips, all bank statements (yes, even your hidden Revolut account) and a salary cert from your employer.
FEES: If you are on a fixed-rate mortgage and plan to switch, you could be charged an ‘early breakage fee’ for doing so. Ask your current lender first.
TIME: Allow between four to six months for the mortgage switching process. There are currently large volumes of applications, and fewer lenders in the market, so turnaround times are slower than usual.
POLICIES: Remember to also switch your mortgage protection and home insurance policies. Ask insurers if they will still be able to cover you once you have switched to a new mortgage lender.
*All figures correct at the time of publication