ConsumerValue: Housing
4. Getting a mortgage
A home loan is probably the biggest financial decision of your life. Even small differences in the terms of your mortgage can make a huge difference to the amount you pay back over the life of the loan.
For example, a €250,000 mortgage at 2.5% over 25 years would cost you around €85,000 in interest. The same mortgage at 3.5% would cost you more than €38,000 extra.
So if you are considering buying a home, it clearly pays to shop around for a mortgage.
If you already have a mortgage, it doesn't necessarily mean you're stuck with it. Other loans might mean lower costs and savings. See the section on switching.
The following section is designed to help you obtain value if you are considering getting a mortgage for the first time.
You can obtain a mortgage from banks, building societies, credit unions and other intermediaries such as mortgage brokers. At the outset, the key things you will need to consider are:
- How much can I borrow?
- What is the best type of mortgage for my needs?
- What is the Annual Percentage Rate (APR)?
- What are the monthly payments over different terms, such as 15, 20, 25, 30, 35 years?
Who should I borrow from?
There are two main options…
Direct from banks and building societies
Banks and building societies sell their own products directly through their branches and may also sell through intermediaries such as mortgage brokers or agents.
So when you visit a bank or building society branch you will be offered the mortgage that only that lender provides.
Intermediaries
If you visit an intermediary, such as a mortgage broker, you will generally have a choice of mortgages from the list of lenders they deal with.
It is worth checking out how many lenders your broker represents. Some brokers provide mortgages from more lenders than others and some lenders only offer their products directly and do not use intermediaries at all.
To find out if your broker is regulated check the Financial Regulator's Registers website or contact the Financial Regulator on Locall 1890 77 77 77.
If you use a broker, make sure to ask what fees you will have to pay, if any. Your mortgage advisor must inform you of any fees payable to him on the application form and loan offer document.
However, most brokers do not charge a fee because their costs are covered by the commission paid by the lender.
Neither a broker nor a lender can link services. This means they cannot offer you a mortgage or a certain interest rate on condition that you deal with a particular estate agent, solicitor or buy a particular mortgage protection product.
What type of mortgage?
Annuity / repayment mortgages
An annuity, also known as a repayment mortgage, is the most common type of mortgage, where you take out a loan for a fixed period of time and pay off the loan plus interest in monthly instalments. (Note that there are other mortgage types such as interest-only mortgages)
The lender works out the amount you need to pay each month to clear your loan by the end of the mortgage term.
Your monthly repayment is made up of two parts:
- An interest payment on the loan
- A capital repayment or repayment of the original loan amount
In the early years, most of your repayments will go toward paying off interest on your loan. But as your loan reduces, the interest goes down. So as time goes on, more of your monthly repayments go toward paying off the capital.
You can choose either a variable rate or fixed rate annuity mortgage.
Different lenders use different ways to calculate interest on your mortgage. Some will calculate interest daily, some will calculate it monthly, while some will calculate it quarterly.
Generally, the more often the interest on your mortgage is calculated, the less you will pay in interest.
Variable rates
Variable rates offer most flexibility. They allow you to increase your repayments, use a lump sum to pay down all or part of your mortgage or re-mortgage without having to pay any fees or penalties.
You can choose from a number of variable rates available, which rise and fall in line with general interest rate changes in the euro zone base rate:
- Standard variable rate – when European Central Bank (ECB) rates rise, your lender may pass on the increase in whole or in part. Similarly, if ECB rates fall, your lender may pass on some or all of the reduction to you. The variable rates offered by a lender also depend on the lenders’ costs and the level of competition in the market.
- Tracker variable rate / tracker mortgages – this is set at a fixed percentage or 'margin' above the ECB rate. As the ECB rate changes so do your repayments. Tracker rates continue over the term of your mortgage however few, if any providers offer tracker mortgages to new customers any more. If you already have a tracker mortgage, you have the benefit of a guaranteed link to the ECB rate so think carefully if you are considering switching.
- Discounted rate – this is a temporary rate, set below the standard or tracker variable rate. It is usually offered to first-time buyers or new customers and gives you lower repayments for an initial period, typically a year. At the end of that time you have the option to go onto a normal fixed or variable rate. Before you accept a discounted offer, make sure you know what rate you will pay after the offer ends and how much it will cost you in total.
- Capped rate – this is a variable rate that will not go above a set level, the 'cap', even if interest rates rise. For example, it could be set at a maximum rate of 6% in the first two years. The rate can rise to that level but not above it, regardless of what happens to the ECB rate. It can also fall in line with ECB rate reductions.
- Loan-to-value (LTV) rate – these rates depend on the size of your loan compared to the value of your home. So, if you borrow €200,000 and your property value is €400,000, you are borrowing 50% of your property value. You then have a LTVrate of 50%. Some lenders offer lower variable rates if your LTVrate is below a certain level, such as 60%.
However, because they rise and fall in line with ECB rates, you have to bear in mind that your mortgage repayments under a variable rate loan can go up or down during the life of your loan.
Fixed rates
With a fixed-rate mortgage, your interest rate and monthly repayments are fixed for a set time. Fixed rates are commonly available over one, two, three, four, five and ten years.
When the fixed period ends your rate changes to a variable rate, or you may decide to get another fixed-rate option.
Although a fixed rate means your repayments cannot increase for a set period of time, your repayments will not fall if rates are cut. As a result, you could miss out on the benefits of lower interest rates.
For those whose finances are stretched, such as first-time buyers, fixed rates offer peace of mind. They may cost more over the long run but they allow you to budget confidently.
However, they give you less flexibility than variable rates. If you are in a fixed rate contract, you will face penalties if you want to switch lenders, move to a variable rate, re-mortgage or pay off all or part of your mortgage during the fixed-rate period.
Also, you cannot usually pay more each month than your standard repayment, so you have less opportunity to save on interest charges.
You should be aware of these penalties before you sign up to a fixed-rate contract.
Remember to use the mortgage calculator on our itsyourmoney.ie website to help you work out your monthly repayment using different APRs and terms.
What interest rate?
The interest rate on the mortgage is the key factor to consider when you are comparing different lenders and products.
When you shop around for the best interest rate, make sure you compare like with like.
For example, if you are getting a range of quotes, they should be based on the same loan amount, the same term and the same type of rate.
You can use the APR to compare the cost of the mortgage. The lower the APR, the less costly the mortgage should be. A variable rate can sometimes work out cheaper over the term of the loan, and is far more flexible.
There are no penalties for early repayment, and the lender should not charge you for switching to another lender.
But a fixed-rate loan can have advantages when interest rates are low. It may also be suitable if you have borrowed to your absolute limit and cannot risk an interest rate increase.
It is also useful to ask about the 'cost per thousand' over different terms. This allows you to work out the monthly repayment yourself over different periods, and to see which lender charges the least.
Use the mortgage calculator on our itsyourmoney.ie website to help you work out your monthly repayment using different APRs and terms.
Other considerations
There are a number of other issues you may want to consider such as:
- Flexibility, particularly if you feel you may want to make extra payments or get a payment break in the future
- The size of loan they are prepared to give you
- How often interest is calculated – generally, the more often the interest on your mortgage is calculated, the better