Fixed, cashback or variable - what is the best mortgage option when interest rates are soaring?

Finding your new home is only half the battle; securing the funds can be just as tricky. In recent years, competition has shrunk in the Irish market, while at the same time, euro zone interest rates have risen sharply, making borrowing more expensive for those looking to buy a new home.

Nonetheless, there are still ways to seek out the most competitive deal.

So what do you need to know?

Mortgage rules

First up is to consider just how much you might be able to borrow, something which is largely determined by the Central Bank’s rules on mortgage lending. If you’re a first-time buyer, and your new home is your first home, then you will be able to borrow four times your income, combined or otherwise. So, a person/couple earning €80,000, for example, will be able to borrow €360,000. Given that the other mortgage rule will only allow you to borrow 90 per cent of the purchase price of your home, an income of €80,000 will translate into a new home worth €400,000 based on a €40,000 deposit.

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Second-time buyers must abide by slightly stricter rules, as they are only allowed borrow 3.5 times their income. Remember, however, that banks can give exemptions to the rules, so check this with your lender.

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Fixed or variable?

It’s also a good idea to start thinking of the mortgage product that best suits you – and to shop around for one that offers the best value.

As part of this, you’ll need to consider whether you want a fixed or variable rate.

The big advantage in opting for a variable rate is that it gives you flexibility in repaying the loan, as you can overpay the loan whenever you may have spare cash to do so. Moreover, if you sell your home and want to repay the mortgage, there won’t be any penalties for doing so.

However, a variable rate means it is up to the lender’s discretion to cut rates – regardless of where European Central Bank (ECB) rates might be. In recent years, for example, some variable rates have exceeded 4 per cent, despite ECB rates being on the floor.

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In today’s market, the better value mortgage products typically lie on the fixed side. And with fixed, many lenders will still allow you to overpay; with AIB, for example, from October 14th you will be able to overpay your mortgage by up to €5,000 each year.

Go green to save money

Mortgage rates have risen sharply in recent years, which means that financing your home is now more expensive. However, there may be a way of getting a better rate.

If you’re buying a new home, for example, it’s likely that you will be entitled to a green mortgage offering. Lenders typically offer these on homes with a Ber rating of between A1 and B3 – achieving such a high rating is usually reserved to newer properties.

For example, homes in the Willows, in Dunshaughlin, Co Meath, have a Ber of A2, while at Cluain Glasan in Kilkenny, all homes are built to a minimum A rating.

Opting for a green rate can translate to considerable savings. Both Haven – AIB’s broker subsidiary – and Bank of Ireland, now offer a rate of 3.65 per cent over a four-year term to qualifying borrowers.

On a 30-year €315,000 loan, opting for a green rate of 3.65 per cent, as opposed to a rate of 4.5 per cent on a standard loan, would save you about €56,000 over the life of the loan, should interest rates stay the same, or about €155 a month. So if you are in the market for a new home, be sure to consider a green option.

Cashback mortgage

Another possibility is to go for a mortgage that offers a lump sum when you draw it down. The advantage of such an offer is clear – a chunk of money that you can use to furnish your new home. And it can be substantial.

With Bank of Ireland, for example, you can get up to 3 per cent of your mortgage back (so €9,000 on a €300,000 mortgage). Two per cent is available at drawdown, with a further 1 per cent possible after five years. EBS has a similar offer, while Permanent TSB offers 2 per cent back at drawdown.

Of course, there’s no such thing as a free lunch, and this can be the case with cashback mortgages, as you may end up paying a higher rate of interest on your loan.

Government incentives

Finally, bear in mind when doing your sums that you may be entitled to some sort of Government incentive. Help to Buy, for example, offers a tax rebate of up to €30,000 to help purchase a new home. It is due to run until the end of December 2024. There are a couple of caveats to consider: if you’ve been working abroad in recent years, you may not have paid enough tax for a full rebate; you need to be a first-time buyer to qualify; and it only works on homes valued at up to €500,000.

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The shared equity, or First Home Scheme, is another incentive aimed at first-time buyers. It is aimed at closing the gap between what you might be able to afford, and what you want to pay, through the Government taking a stake in your property, of up to 30 per cent (or 20 per cent if you’re also getting Help to Buy). All the main lenders have signed up for the scheme, and homes valued at up to €500,000 may be eligible.

It is available in new home schemes such as Semple Woods, in Donabate, north Dublin, where homes start at €475,000, and Parkleigh on the Grand Canal in Dublin 22, where prices start at €425,000. It has also been recently extended to those who are building their own new home, for the first time.

Bear in mind, however, that the equity stake will have to be repaid should you choose to move, and if you don’t, you will start paying a fee on it from year six.

Table: The best green rates

Rate (%) Term (years)

BOI 3.65 4

Haven 3.65 4

AIB 3.85 5

EBS 3.75 4

Source: Bonkers.ie, based on maximum LTV of 90 per cent