Borrowers caught in grip of mortgage war

Allied Irish Banks (AIB) has thrown down the gauntlet to its rivals in the mortgage market with the latest reduction in its standard variable rate (SVR). Last week, the bank cut its SVR from 3.4% to 3.15%. It also introduced a new seven-year fixed-term rate of 3.5%. The SVR cuts are open to new and existing customers, although all the AIB group customers are not quite as equal as the bank likes to make out.

Permanent TSB and Bank of Ireland, meanwhile, are battling it out on the cashback front, though the refund offers may be masking some of the highest rates in the mortgage market.

We look at the so-called mortgage war, and ask whether customers are the real winners, or whether this is a phoney combat.

If you want cashback

Bank of Ireland has concentrated on winning mortgage business through its 3% cashback offer to new customers. The bank gives 2% back on mortgage drawdown and another 1% after five years.

At the end of August, Permanent TSB launched a 2% cashback on monthly mortgage repayments. It already had a one-off cashback payment of 2% on the full mortgage.

So, customers with a €300,000 mortgage will get €6,000 from the bank on loan drawdown and €30 each month directly to their PTSB account between now and 2027.

The Competition and Consumer Protection Commission (CPCC) has urged consumers to “focus on mortgage rates over cash incentives”.

Aine Carroll, director of communications and market insights at the CPCC, said its research showed that special offers make it harder for consumers to compare one product with another and that it detracts from the most important part of the mortgage: the interest rate.

Traditionally, cashback lenders tend to have higher SVRs. Permanent TSB and Bank of Ireland’s variable rates are as high as 4.2%, now a full percentage point higher than AIB for a loan to value (LTV) of 80% or over. You can also get the cashback at the fixed rate, which is 3% for an LTV of less than 80%.

Bob Quinn of The Money Advisers suggested that mortgage holders could make the most of the cashback deal by removing their business from one lender after they receive the cash, moving to another lender and then doing the same there.

“If they were getting a €500,000 mortgage, they could legally make €30,000 in cashback offers by moving banks in a few months,” said Quinn.

Michael Dowling of Dowling Financial warned there is no guarantee that the new lender will accept you.

Most banks will also want to see 12 months of payments towards your most recent mortgage before they accept your business.

There’s another catch. With the Central Bank of Ireland carrying out a review of the mortgage market, many think cashback offers will not be around in 12 months’ time.

Check out your LTV

Una Cullen is on a variable rate of 3.7% with EBS. Her LTV rate is less than 50%, and Cullen pays €494 a month for her mortgage. Were she to switch to AIB’s new LTV rate of 2.95%, Cullen could save about €30 a month or nearly €5,000 over the 14 years left on her mortgage.

She feels that AIB, which bought EBS for €1 in 2011, should pass its recent interest rate cut on to EBS customers. When she queried this with AIB on Twitter, it responded saying EBS was a “separate financial entity” and that rates were being reviewed.

Unlike AIB, however, EBS does apply rate cuts equally to new and existing customers. “I feel discriminated against on a number of levels. I would be eligible for EBS’s LTV rate, which is 3.3%, but it’s only for new customers. I feel AIB’s cuts should filter down to EBS customers.”

Cullen said she phoned AIB on Friday to see if she could switch her mortgage from EBS to AIB. “I would have to apply for a new mortgage, I would have to submit my pay slips. I just feel I shouldn’t have to go through the process all over again when really there is something wrong there.”

Quinn said mortgage holders who have reduced their LTV in recent years could be paying over the odds in interest.

“If you find your property is worth an LTV of less than 50% you may still be on a mortgage rate band of over 80%. You can apply to a lender to get your house revalued. You’ll have to incur the cost yourself — about €175 for a valuation — but if your house comes in at less than 50% you can ask your bank for a lower rate,” said Quinn.

“If you’re someone who wants to borrow less than 50% loan to value and you’re looking for a variable rate, then AIB with its 2.75% is the best on the market.”

If you want peace of mind

Now could be a good time to fix your rates at four or five years for long-term certainty.

Trevor Grant, director of Affinity Advisors and chairman of Associated Expert Mortgage Advisors, said fixing at three years doesn’t make sense now as the European Central Bank (ECB) holds off raising rates. Four and five-year rates are more appropriate.

Ulster Bank’s four-year rate is available to customers borrowing more than €300,000 with an LTV of 80% or less and at a rate of 2.6%. Ulster Bank offers a five-year fixed rate at 2.99% while KBC’s is from 3%.

“If you can fix now at a price that’s equal or close to the variable rate, then it makes sense,” said Grant.

Both Ulster Bank and AIB now offer seven-year fixed mortgage rates: Ulster Bank’s rate on 90% LTV is 3.99% compared with its 4.3% SV rate. AIB’s new seven-year rate is at 3.5%.

“Seven years is a very long time. You’d want to be sure you’re not going to move house in that time as there is a penalty for those who break fixed rates,” said Grant.

Best of both worlds?

You can consider splitting your mortgage rate into fixed and variable. “You don’t have to go 50/50, you can do whatever multiple you wish,” said Quinn.

“The advantage of fixed is it gives you certainly; the disadvantage is you can’t increase payments and there’s a penalty if you want to pay off a lump sum. By splitting your rate it gives you the best of both worlds.”

Carroll said mortgage holders on fixed rates should start research rates at least 18 months before the end of their fixed-rate term.

Inertia is the best weapon banks have, said Dowling.

“The level of switching is low but fundamentally people have no faith in the process,” he said. “It’s a very slow, cumbersome process, switching from one provider to another, but you can definitely save money.”

Dowling said if you’re at the start of your mortgage application process, you should ring your bank and make them aware of what AIB is offering. “Banks will negotiate on rates on a case-by-case basis. It’s always advisable you talk to your own bank first before you consider switching to another lender.”

Tracker is still king

All tracker mortgage holders need do is sit pretty and hope that the ECB delays raising interest rates for as long as possible. The average tracker rate at present is 1% and has been for the past three years.

Those on tracker mortgages looking to buy a new house can bring their tracker mortgage with them. So, if you have a mortgage of €150,000 and need a mortgage of €250,000 to buy a new house, the €150,000 will stay at the tracker rate. The other €100,000 will be based on the mortgage rates from that lender.

Bank of Ireland allows you to retain your tracker for five years. Ulster Bank allows you to retain it for 10 years. All banks charge a premium on the switch, adding about 1% on the margin. It will still work out as cheaper than the variable rate — for as long as it lasts.