Switching mortgage? Beware of ‘special offers’

September 14, 2017

Are you thinking about switching your mortgage? Depending on your interest rate, you could make significant savings by switching, but don’t be distracted by the lure of cash back and other special offers that could end up costing you in the long run.

Can you switch?

Generally if you are on a variable rate, you could switch your mortgage at any stage.

If you’re on a fixed-rate mortgage, you won’t be able to switch within the fixed term without paying a penalty. This could be quite costly and might not make it worth switching. But if you are coming to the end of a fixed-rate you could start doing some research now. If you’re on a cheap tracker mortgage it’s unlikely you’ll get a better rate.

If you’re considering switching, your first step should be to know what your current mortgage interest rate is as this impacts your monthly repayments.

Are special offers worth it?

When you start to look at different options for switching your mortgage, you’ll see that most lenders have special offers to encourage you to move your mortgage to them. These usually include:

  • a percentage of the value of your mortgage back in cash
  • a set amount of cash back
  • paying all, or part, of your legal and/or valuation fees

Cashback offers are attractive because they give you money in the short term. But they might not make financial sense in the long term if you look at how much the mortgage will cost you overall. The lenders that have these special offers often have higher interest rates, so it’s important to look at the interest rate they are offering.

You should always think about the interest rate, because a lower interest rate means significant savings on your mortgage, for example:

Ciara has a mortgage outstanding of €300,000 on her home in Galway, currently valued at €360,000. Ciara wants to switch her mortgage and decides to go with a variable rate mortgage. Her current loan-to-value ratio is 83% and she has 25 years remaining on her mortgage. After doing some research, Ciara considers two options:

  • Lender A, who is offering 2% cashback and an APRC of 4.6%
  • Lender B with no special offer but a lower APRC of 3.6%

Take a look at the true cost of both of these options:

Lender Amount borrowed APRC Monthly repayments Total cost of credit Cashback Total cost of credit (minus cashback)
A 300,000 4.6% €1,667 €200,249 €6,000 €194,249
B 300,000 3.6% €1,502 €150,561 €0 €150,561

If Ciara takes the cashback offer, it will actually cost her €43,688 more over the lifetime of the mortgage because of the higher interest rate. Her monthly mortgage repayments with Lender A would also be €165 more than they would be with Lender B.

Compare your mortgage rate

So don’t let the short term gain of a cashback offer dazzle you, the interest rate actually determines your monthly repayments and how much you spend on your mortgage altogether. When you’re switching mortgages, you should compare the mortgage interest rates out there. You can do this easily using our mortgage Money Tool. The tool will show you the difference between what you are currently paying and what is available in the market, your monthly repayments and the cost over the lifetime of your mortgage.

Find out more about switching your mortgage and what to consider.

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