When switching mortgage, which is cheaper: existing lender or a different provider?

It’s been a difficult 15 months for some mortgage holders. It seems the days of floor-scraping interest rates are behind us, at least for the immediate future.

The European Central Bank is on its ninth interest rate hike in a row with its main lending rate kicked up to 4.25 per cent. Which would make anyone on a tracker or variable mortgage look back on June 2022 with rose-tinted glasses when the key ECB rate was zero and times were simpler.

For first-year economic students, the reason for the rate hikes is clear. Making money more expensive to borrow is a lever to pull when inflation is rising.

For people who needed the loan of a couple of hundred thousand euro to buy their house, these rate increases get passed on from their banks following the ECB pattern. Depending on the terms of their loan, some could see repayments go up by hundreds per month, which is financially painful enough without the added pressure of a cost-of-living and energy-price crisis lumbering on at the same time.

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For example, a person with a €350,000 30-year mortgage coming off a three-year, fixed-rate mortgage set at 2.55 per cent might be staring at a variable rate of 4.25 per cent (APR) now the honeymoon is over. While their repayments might have been €1,386 at the start they could be having to fork over €1,705 with the rate rise and potentially more if they look to lock in another fixed rate.

Then there are the remaining 170,000 folk still on tracker mortgages in the State whose rates follow the ECB with an added margin of about 0.70-1.5 per cent. Thanks to a shouting man on a bus and a banking scandal, most people understand what a tracker mortgage is now. But no more so than the people paying them back who have seen their interest rates increase over the 5 per cent mark.

The ECB governing council, the people who decide which way to pull the money lever to make borrowing costs rise or fall, are set to meet again next week and another interest rate hike could be on the table.

[ Minister meets banks to discuss homeowners’ interest-rate challenge ]

[ Global stocks rise in expectation of pause in interest rate hikes ]

With yet another rise in mortgage repayments looking possible, many households will be looking for the best deal either to reduce costs or to give themselves peace of mind by locking in to a fixed-term to protect against future rises.

By doing nothing, you are betting that interest rates will fall and the household finances can tolerate potential rises in the meantime. Or you could take the view that rates will rise and it would be best to fix them now.

No one can know for certain but if mortgage customers are deciding whether to stick or twist, here’s what they should know about making the switch.

Savings or certainty

It’s important to know what is motivating your switch. Is it to find the best possible deal right now or is it to know for certain that you can afford your repayments for at least a few years? Different answers might mean taking different courses of action according to Daragh Cassidy of mortgage brokers Bonkers.ie.

Across-the-board rate rises have made it harder to bargain hunt but Cassidy says there are still savings to be made. However, customers need to weigh up their individual circumstances rather than blindly switching their mortgage to the lowest rate they can find.

‘Yes you can get a rate as low as 3.6 per cent for a green mortgage but if you’re paying anything below 4 per cent, you might only save €20-30 a month, that might not be worth their while when costs are factored in,” he says.

“For most people it makes more sense to switch if they were paying 2.5 per cent on a tracker or a fixed term that ended and they want to move into a fixed rate for the next five years for some stability.”

According to Cassidy, the lowest rates currently available tend to be for green mortgages for properties with Ber ratings of B3 and better or loans with values above €250,000 that might count some of those with pre-existing mortgages out.

“Realistically, the best rate most people are going to get now is around 4.1 to 4.3 per cent so if you’re paying 5 per cent and above you would save,” he says.

But for those “paying 3.5 to 4 per cent” the answer “will probably be no” when deciding whether to switch.

For Sean Corbett, sales director at Mortgage123.ie, those with tracker mortgages need to decide if they can tolerate the exposure to further rate rises.

“My advice is if you’re on a tracker that is nearly 5 per cent or above there are rates still sub 4 per cent you could avail of for peace of mind.”

Customers should never underestimate the certainty of knowing how much they have to pay every month and how that can reduce stress, even if rates may drop, Corbett says.

“The upside of a fixed rate is peace of mind and certainly things could settle down and inflation could go back down but a fixed rate lets individuals pick something you can afford now and still live once you lock it in.”

[ McGrath pressures banks to raise interest rates for savers ]

Cassidy says “there are some benefits” to being on a tracker as evidenced by the historic low interest rate periods of the past few years. “They could save in the short term by switching but they need to get good financial advice because… once they leave they can’t go back when interest rates dip,” he says.

“People tie themselves in knots worrying whether or not they’ll save but it’s not just about money, it’s your peace of mind because, outside of childcare, your mortgage is your biggest bill and locking in a fixed rate can take the pressure off.”

The other thing to take into account is where you are in life and what plans you have for the future.

“If you plan to sell in three years time then there’s no point in picking a five-year fixed rate when you might have to pay penalties to break when you sell,” Corbett says.

Costs of switching

If a customer is planning to switch between lenders, they could end up paying “between €1,500-€2,000″ in potential legal and valuation fees, according to Corbett.

“When switching lender you have to get a solicitor involved to put another lender on the deed to make sure the house is planning compliant and then there’s a valuation fee of around €200-€250,” he says.

“It does put people off because they remember the pain they went through the first time around submitting all their payslips etc.”

The good news is at least the costs are much lower than the €5,000-€6,000 forked out by first-home buyers.

[ Lenders approve record number of mortgages for first-time buyers ]

The second is that lenders attempt to make up for the costs through incentives like cash-back schemes to encourage the switch.

“Permanent TSB will give you 2 per cent of the mortgage back in cash and that might more than offset the switching fees, Bank of Ireland will give you up to 3 per cent but that’s only on certain rates,” he advises.

“The best rate might not come with cash back so you do need to ask your broker.”

Then there’s the fee itself for breaking a fixed-term mortgage, in some cases this could be a hefty penalty depending on the terms and circumstances so it pays to get acquainted with the fine print.

Current lender

For both experts, the first port of call for anyone looking to switch should be their existing lender, who is legally obligated to advise you of rate rises and present you with alternative options with enough time to get your affairs in order before they hit.

Sticking with an existing lender also gets around having to use a solicitor or potentially being knocked back by another lender because your circumstances have changed.

“This doesn’t mean a period of unemployment – this could be having a child so your expenses are higher or taking out a car loan since you were first approved,” Cassidy says.

Once households are mortgage-approved “they tend to loosen their belts a little” in the interim now that lenders aren’t scrutinising their finances, which might hurt them when looking for a better rate, Cassidy says.

The good news is that lenders take into account equity and increased home values when working out the current loan-to-value ratio, Corbett says, meaning those who have paid off a bit and have seen their house increase in value may be able to avail of lower rate loans.

The same goes if insulation upgrades mean an old house suddenly has a higher Ber rating, qualifying for a green mortgage.

There are plenty of options for those figuring out whether to stick or twist but professional advice for personal situations should be sought first.