Switching your mortgage – review your options

Can I switch?

To see if you are eligible to switch you need to think about:

  • Your Loan-to-Value (LTV) ratio, which is how much you owe on your mortgage in relation to how much your house is worth. Lenders will look at your loan to value ratio when considering your mortgage application. In general, borrowers with lower LTV ratios will qualify for lower mortgage rates than borrowers with higher LTV ratios. For example, if you have €150,000 left on your mortgage, and your house is worth €300,000, your LTV is 50%.
  • The outstanding balance on your mortgage. If you have a small outstanding balance, you may find it difficult to switch – the average minimum new mortgage accepted by Irish banks for someone switching is in the region of €25,000 – €50,000.
  • Whether you are in negative equity. Negative equity is when you owe more on your mortgage than your property is worth. Generally, lenders won’t approve your application if you are in negative equity.
  • Your mortgage term remaining. Minimum and maximum loan terms can apply to you if you are switching. This means that lenders may not accept your application if you want a mortgage term over 30 years or less than five or ten years.
  • Many lenders will want to see that you have been making payments on the mortgage over the last 12 months.
  • Whether you meet certain criteria. For instance, you will need to meet the new bank’s income criteria. If your personal circumstances have changed since you first took out a loan, you may have difficulties switching.
  • The lender’s switching policy. Different lenders have different policies when taking on switchers and apply their own loan to value limits, which could in some cases be 80% to 90% of the current value of your home. However, the Central Bank mortgage lending requirements do not apply if you are switching your mortgage from one institution to another. This means that you are exempt from the loan to value limit and loan to income limit that applies to second time buyers.
  • Your credit rating. An Irish Credit Bureau(ICB) check will be done by the new institution. From 30 June 2017, they can also check the Central Bank’s Central Credit Register. Any new loans or credit cards you have taken our since your first mortgage will be considered by your lender.  If you are in mortgage arrears, you may not be able to switch. If you’re on a tracker mortgage, there may be no benefit to switching as you won’t find a rate as low as the one you currently have.
  • If you have a fixed rate mortgage, with your current lender and you break out of it early, you will have to pay a penalty. The penalty fee, sometimes known as a redemption charge, will take account of factors such as interest rate, your mortgage outstanding and the length of time you have left in your fixed rate period. However, you can still use the time between now and the end of your fixed term to consider your options.

Can I save money?

  • Your first step is to make sure you fully understand your current mortgage. This will give you the confidence you need to make decisions about your mortgage and decide if it makes sense to switch. You should be aware of your current mortgage interest rate and know how this impacts your monthly repayments.
  • You can compare your options using our mortgage comparison tool. It can be hard to compare rates across the different providers in the market so we have combined them all into one comparison tool to make it easier for you to compare switching rates.
  • 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.
Example
You have a remaining balance on your mortgage of €250,000 and your house has a market value of €350,000. Your mortgage term remaining is 25 years. Your current monthly repayment is €1,350 on a variable interest rate. Using the mortgage comparison tool, you could potentially save €125 each month and approximately €37,530 over the lifetime of the mortgage if you switched to a lower rate. Remember this does not include any additional costs (such as legal fees etc).

This is an example only (August 2017).

  • The mortgage type you choose is important and you should weigh up the pros and cons of choosing either a fixed rate or variable rate.

Information on variable rates and switching

From 1 February 2017, lenders must provide you with additional and clearer information if you have a variable rate mortgage. Lenders must:

  • explain to you how they set their variable interest rates
  • give an explanation if there is an increase in the interest rate
  • provide information about other mortgage options they have that could be better value for you. This should be done once a year and should also be done when letting you know about an increase in the variable interest rate. It will include details of where you can get more information and a link to our mortgage comparisons to help you if you want to switch mortgages

Learn more about what information lenders must give you on the Central Bank’s website.

Things to consider

Reviewing your loan to value (LTV)

You could get a better deal with your current lender so it might be worthwhile checking before you start applying to other lenders. With most lenders, the interest rate you get will be based on your loan-to-value ratio (LTV). Over the lifetime of your mortgage your LTV will change, based on the balance of what you owe reducing, and any change in the value of your home.

It is important to be aware of your LTV as it is possible it has changed since you drew down your mortgage. Lenders do not contact their customers directly encouraging them to review their LTV, so you should contact your lender if you think your LTV has changed. You will need to get an update valuation of your property, which cost you about €150. You may then qualify for a lower rate based on your revised LTV.

 

Example – reviewing your LTV
Jenny took out a mortgage four years ago to buy a property in Dublin. The house cost €250,000 and Jenny borrowed €210,000 from her bank after choosing a variable rate mortgage, with an APRC of 4.6% over 35 years. Jenny’s LTV was over 80% at the time and her monthly repayments were approximately €1,005 per month.

Four years on, Jenny gets a valuation of her house and it has risen in value to €400,000, with the bank confirming that her mortgage outstanding is €199,200. She is now in an LTV band of up to 50% and can avail of a lower variable rate of 3.1% with her provider, meaning her revised monthly repayments are now €835.

Jenny has saved herself €170 per month simply by taking the time to review her LTV. Over the lifetime of the mortgage, this will amount to approximately €63,450. When we include the €150 valuation cost, Jenny has saved herself €63,300.

This example is for illustrative purposes only (August 2017).

 

Costs involved in switching

If you can switch your mortgage, there will be some costs involved including legal fees. Compare your current deal with any you might consider switching to and think about all costs involved. These can include:

  • Redemption fees – this is the fee to cover the cost of breaking your fixed rate.
  • Legal costs – some lenders may offer to meet the cost or pay a contribution toward your legal fees. Check first if there is a limit on how much the new lender will pay, if the legal fees are more than this, you will have to pay the remainder of the cost.
  • Valuation fees – the new lender will want a current valuation of your house. The cost of this will generally be incurred by you.
  • Product fees – some lenders charge a fee to arrange the loan. This can be around 0.5% of the total cost of the mortgage.
  • Brokers’ fees – some brokers charge a fee to give you mortgage advice or to arrange your mortgage. Many brokers do not charge a fee so it’s worthwhile checking in advance.
  • Administration fee – some lenders charge this fee to cover additional services before you receive your mortgage. You may also be charged this fee for rearranging the terms of your mortgage. You may not get your money back if you do not go ahead with your mortgage application.

 Are special offers worth it?

Most lenders offer incentives to encourage you to move your mortgage but you should consider if these incentives are really worth it.  These incentives typically include:

  • getting a percentage of the value of your mortgage back in cash
  • a set amount of cash back
  • money towards your legal 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. You should always think about the interest rate, because a low interest rate is what could mean significant savings on your mortgage.

The Mortgage Credit Regulations  were introduced in March 2016. These regulations prevent lenders from  requiring mortgage holders to repay cash-back payments if they took out a mortgage since March 2016. So if you took out your mortgage since March 2016 and got a cash-back payment from your lender, you don’t have to repay this money if you switch your mortgage to another lender.

Take a look at the example below before you choose a mortgage based on a special offer:

Example – the cashback incentive
John has a mortgage outstanding of €300,000 on his home in Dublin which is currently valued at €360,000. John wants to switch his mortgage and decides to go with a variable-rate mortgage. John’s current loan-to-value ratio is 83% and he has 25 years remaining on his mortgage.

John is doing research and finds a bank that is offering cashback to the value of 2% of the amount borrowed. John is delighted that he will get €6,000 cash back to move to Lender A. But there is another lender in the market with a lower APRC and no special offer – the table below shows the true cost of both options.

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

 

This will prove quite a costly decision for John. The temptation to take the 2% cashback offer will cost him €43,688 over the term of the mortgage. His mortgage repayments with Lender A are also €165 more expensive a month than they would be with lender B.

Financial advice

Make sure you are happy that any decision you make is right for you. To help with this, you may want to get financial advice. You can get a list from the Central Bank’s register website (click into ‘by register’ – ‘Register of Investment Product Intermediaries’) but make sure you know what type of advisor you are using, how many lenders the broker represents and what they will charge you.

 

How to switch

If you are switching to a new lender the switching process is the same as applying for a new mortgage. You can apply for a mortgage in two ways:

  • Directly to the lender.
  • Through a mortgage intermediary (broker) – in this case, your broker will deal directly with the lender on your behalf.

Documentation you will need

It depends on the lender but usually:

  • Proof of your identity: such as a valid passport or driving licence.
  • Proof of your current address: such as a household bill in your name.
  • Proof of your income: including your latest P60 and at least three recent salary slips.
  • Evidence of how you manage your money: usually current account and loan account statements for the previous 12 months.
  • Evidence of any savings you have.

It’s a good idea to keep photocopies of any documents you give to your lender or broker.

Personal  information you need to make an application

  • Employment status – lenders will want information/proof as to what type of employment contract you are on. For example, permanent, contract, full-time, part-time etc.
  • Your income – lenders will look at your annual income and some may take bonuses or overtime into account. Some lenders may factor in rental income if you plan to rent out spare rooms.
  • Your age – and also the number of years left until you retire.
  • Outgoings – in addition to any loan repayments, lenders will look at any financial commitments you have, such as childcare costs.
  • Value of your house – this is the market value, or purchase price of your house. You will need an up to date valuation.
  • Amount you need to borrow – how much you are looking to borrow. This will be based on what you currently owe, called the redemption figure. You can get this figure from your current mortgage lender.
  • Direct debit – a new direct debit will have to be set up with the new lender, check that when the final month’s payment is made to the old lender, that you cancel the direct debit in writing with your previous lender and the bank you have your current account with to ensure no further payments are taken.
  • Guarantor- if anyone will act as a guarantor, by agreeing to repay the loan if you are not able to. This may be a family member.
  • Mortgage protection insurance – if you are switching will your original policy cover the mortgage? You should notify your insurance company and tell them you are changing mortgage provider as they will have to note the new lender on the policy.

After you’ve applied

Many lenders give ‘approval in principle’. This means that your lender approves you for a mortgage of a set amount, based on the details you provided in your application. However, the ‘approval in principle’ will only last for a period of time, usually 3-6 months and the lenders will also have other terms attached to your approval such as:

  • Your mortgage offer will have an expiry date – you must draw down your mortgage before this date. Once a loan offer expires, you will need to apply again and if your circumstances have changed or your lender’s criteria have changed, you may not get approval again.
  • The interest rate shown on your mortgage loan approval is not necessarily the rate you will pay. Usually, the interest rate for your mortgage will be set only on the day that the money is actually lent to you.
  • Keep a copy of all correspondence and documentation in a safe place.
  • When your mortgage is approved, your lender will ask you to fill in a direct debit form so your repayments can be collected from your bank account.

How long will it take to switch?

There is no specific timeframe applied to mortgage applications. The process depends on many different factors such as gathering of documentation, valuation surveys and putting mortgage protection in place etc. but it is likely to take a couple of months.

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