ConsumerValue: Housing
5. Switching a mortgage
As a refresher it may be useful to also visit the section on getting a mortgage to remind yourself of the process.
What do I need to know before deciding to switch?
Start by checking the small print in your existing mortgage's contract to see if you are liable to pay a penalty for ending your agreement with your old lender.
By law, you cannot be penalised for repaying a mortgage early, but if you have a fixed-rate mortgage you may have to pay the cost of breaking the fixed-rate contract.
Then you need to cast a careful eye over the new lender's terms and conditions to see what you might be letting yourself in for.
You will need to know:
- The maximum amount the new lender will give you
- The loan's APR (annual percentage rate)
- What mortgage terms are available (for example 20, 25 or 30 years)
- What the repayments will be if you decide to take a shorter term. This can save thousands in interest over the life of your mortgage - but not, of course, if higher mortgage repayments result in you having to borrow elsewhere, such as on your credit card
- Whether you can pay more often. For example, paying fortnightly instead of monthly could reduce your overall interest bill depending on how often the interest is calculated
- What effect a hike in interest rates (by 1%, 2% etc) will have on your repayments if you are on a variable rate
- Whether flexible terms are available such as payment breaks
- If the new loan is fixed rate rather than a variable rate mortgage, what the fee is if you pay it off early
How do I know if the new mortgage is cheaper?
Check the latest surveys in a price comparison website or the price charts in some Irish newspapers' business and personal finance pages.
Remember, though, that some surveys may not include newer entrants to the Irish market.
When comparing products, always compare like with like. Make sure the quotes you get are for the same loan amount, the same term and the same type of scheme ("variable" versus "variable" or "fixed" versus "fixed" etc), then compare the APR (annual percentage rate) figure with the one for your existing loan.
If you are comparing like with like, a lower APR usually means the loan will cost you less in interest over that same period.
Couldn't I just use a broker to shop around for me?
You could. The main advantage is that a mortgage intermediary (a broker or agent) can take some of the work out of shopping around.
But one disadvantage is that this may come at a cost. Always bear in mind that the broker's advice may be very limited.
For example, he or she might only represent one or two lenders, so get a list of the lenders they do arrange mortgages with.
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.
What's a redemption fee?
This is a fee to redeem or pay off your mortgage and is prohibited under the Consumer Credit Act. A fixed-rate redemption fee is different.
It is a fee for breaking a fixed interest contract, whether or not you redeem your mortgage.
If your mortgage is a "fixed-rate" type rather than variable rate, you will have to pay this charge for terminating a loan agreement early (which you would be doing if switching to another lender).
This fee can be quite hefty, so take account of it in working out whether to make the switch.
Also, if your old loan was a variable-rate one, think twice about moving to a fixed-rate one because you could face these redemption fees further down the line.
While lenders aren't allowed to charge a redemption fee or penalty for switching from a variable rate mortgage, some do try to claw back discounts or "free fees" if you switch within a specified time after taking out your old mortgage, so check the terms and conditions.
Which is better then, fixed rate or variable?
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 can't risk an interest rate increase.
Home-owners currently holding “tracker” mortgages, a variable type of loan where the interest rate payable is pegged at a certain margin above the base rate, should be especially prudent about switching their mortgages in the current “low base rate” environment.
The banks have now largely withdrawn tracker mortgages for new business, as borrowing difficulties for the banks themselves have started to drive up the cost of credit, which cannot be passed on under the tracker arrangement.
As such, in the current climate the tracker is (in nearly all cases) the most advantageous mortgage type, so any borrower thinking of pulling out of a tracker should do their calculations very carefully first.
If set at a competitive margin above the base rate, there is a chance you may not find a better deal in the near term.
Besides a redemption fee, are there other costs if you switch your lender?
Yes, and these may apply in the case of both fixed and variable mortgages. You may face valuation fees, legal fees and other charges such as a "deeds release" fee from the Land Registry.
Your new lender may offer to subsidise some of these costs or even absorb all of them, though one condition may be that you have to use one of the lender's own recommended solicitors.
If you want to use your own solicitor, remember that the one who originally did your conveyancing will already have all your details on file and may offer you a special rate.
Besides switching to another lender, are there other ways of cutting down the cost of my home loan?
Yes, there probably are. Your bank or building society will insist that you take out various forms of insurance as part of the condition of the loan.
But if it offers you one of their own insurance products you don't have to take it. You are free to shop around for the best value in terms of:
- Home insurance
- Your mortgage protection policy. This insurance is designed to pay the balance of your mortgage if you die. You are legally obliged to have adequate mortgage protection cover on your home loan. So review the premium of your existing policy on a regular basis to make sure you are getting the best deal.
Also see the section of ConsumerValue on insurance.