So you’ve scrimped, you’ve saved, and you’ve spent weekend after weekend traipsing through houses and apartments in neighbourhoods you know well… and some you’ve barely heard of!
You’ve been to the banks and the brokers and you’ve managed to get yourself approved for a mortgage.
You’ve saved enough for a deposit, finally closed the deal on a place you plan to call home, and you’ve drawn down your first ever home loan.
It’s an epic achievement and you’re delighted with yourself and your new home…
And of course, you’re now completely skint. Absolutely smashed broke.
Getting into your new home is great and all, but you need furniture, plates, shelves, and a shower to replace the pink hose that was attached to the bath taps back in 1976.
And that moving-box-as-a-coffee-table just isn’t ironic or funny anymore.
So, you seriously need a few quid for a major spree at Ikea.
Which, I have to imagine, is why the Bank of Ireland’s 2% cashback deal on new mortgages has been so successful.
Cash at a time when it’s needed most
People moving into new homes need cash because they’ve blown all theirs on deposits, lawyers, valuations, stamp duty, and all the other expenses that go with buying a home.
So imagine a first time buyer being handed thousands of euro in actual spending money which can be used to buy furniture and bedding and curtains. Pretty tempting right?
Well since June 2015, Bank of Ireland has been offering customers 2% of the value of their mortgage in cash. And it looks like plenty of people were tempted because they reportedly wrote one in every three mortgages last year. Which is a huge chunk of the market for a bank that doesn’t even have the best rates.
And with imitation being the sincerest form of flattery, Permanent TSB followed Bank of Ireland’s lead and started offered their very own 2% cashback deal last month – which prompted Bank of Ireland to extend their own offer out to June.
Then the Aussie near-prime mortgage lender Pepper Homeloans opened for new mortgage business last week saying they’ll lend to the self-employed and people who got into arrears after the bust.
So it seems to be all go in the mortgage market right now. Which is quite a turnaround from a couple of years back when you could only get a loan if you could absolutely prove that you didn’t need one in the first place.
Cashback vs lower rates – which would you take?
And so here we come to the bricks and mortar of this whole post…
KBC Bank has just released the results of some research it has done into first time buyers that bought homes over the last three years, and first time buyers that are currently in the market to buy a home.
According to KBC, 45% of the first time buyers that have already bought homes said that long-term savings over the life of their mortgage would be the most important factor if they were to do it all again… Which suggests that many of them signed up to mortgages with cashback deals.
And now only 20% of them would be attracted to short-term savings such as cash incentives (i.e. cashback deals).
And for those planning to buy in the next two years, 58% said that long term value was the key reason for choosing a mortgage provider.
Now of course this is interesting because KBC currently has the best rates in the market for first time buyers, and KBC does not offer cashback on new mortgages.
But… the cash incentives from Bank of Ireland have clearly been working to lure in new mortgage customers, so much so that Permanent TSB has now mirrored their 2% cashback offer!
Which leads us to the big question:
What’s the difference between a lower mortgage rate and a cashback offer?
Well, we will need an example to make this work, so here goes:
Nora is a frugally minded first time buyer and only wants to save a 10% deposit. The Central Bank allows first time buyers a deposit of 10% on a home up a value of €220,000 so let’s look at a home costing that much. And she's only interested in a variable rate mortgage because she hopes to be able to pay lump sums off the principal with her bonuses.
With a deposit of €22,000 our Nora will need to get a mortgage of €198,000.
If she takes out a mortgage with KBC and signs up to current account with them, she should be able to get a rate of 3.65%.
If she takes out a mortgage with Permanent TSB, she should be able to get a rate of 4.2%.
And, if she takes out her mortgage with Bank of Ireland, she should be able to get a rate of 4.5%.
As most first time buyers are youngish and try to keep their payments down, we’ll imagine that Nora is signing up to a term of 30 years.
And before we get to the calculations, we’ll look at the payments over the first five years because Nora can switch away from Bank of Ireland or Permanent TSB after five years – any sooner than that and she’ll have to pay back the cashback.
So with KBC, she’ll have a monthly payment of around €906 per month.
With Permanent TSB she’ll have a monthly payment of around €968.
And with Bank of Ireland she’ll have a payment in the region of €1,003.
There’s a difference of up to €97 per month between the lowest and highest payments, which is quite a bit, but remember that with both Permanent TSB and Bank of Ireland, she’ll receive that 2% cashback which amounts to a cool €3,960.
Cost of cashback
With Permanent TSB, Nora will pay €3,720 more than she would with KBC over the first five years. But when you factor in the cashback, so she’ll actually be ahead of the game by €240. She will need to get a better rate or find a new mortgage provider though, or she’ll start losing money shortly after that.
With Bank of Ireland, Nora could pay €5,820 more than she would with KBC over five years. So even with the cashback, she could pay €1,860 more than she would with KBC.
As we know, plenty of first time buyers will need cash to get started in their new homes. But it is worth thinking about the cashback offers as though they were personal loans, because essentially you will be paying the money back through higher rates.
So let's compare KBC Bank’s lower mortgage rate to the cashback deals from Permanent TSB and Bank of Ireland:
The Permanent TSB cashback offer is a bit like an interest free personal loan.
The Bank of Ireland cashback offer is like a personal loan with an interest rate of around 16%.
Now my examples depend on mortgage customers switching after five years. But it’s unlikely that the majority of customers will do this. And plenty of mortgage customers will simply not be able to switch after five years.
In our Mortgage Video series, Dave Curry from the Irish Mortgage Corporation says that within a few years of taking out a mortgage, many people would actually no longer qualify for their own mortgage if they were to apply for it again! That’s because circumstances change, kids come along, and many families go from two salaries to one.
So here’s the bottom line. The cashback offers are great and can really help people get started in a new home. But if you don’t get a better rate after five years, that €3,960 cashback could end up costing you nearly €31,000 by the time your mortgage is paid off.
And of course, you can compare mortgages and find the best rates right here on bonkers.ie
A post like this needs some small print, so here it is…
I have used a property valued at €220,000 because that’s the Central Bank’s threshold whereby a first time buyer need only supply a 10% deposit.
I have used KBC, Permanent TSB and Bank of Ireland as examples here because of KBC’s survey released this week made reference to the incentives on offer from other banks – and the cashback deals on offer are currently with Permanent TSB and Bank of Ireland.
For consistency when calculating payments, I used the MyHome.ie mortgage calculator rather than the banks’ own calculators. I have also not included introductory fixed rate offers or other specials that may be available from the three banks referred to here. Therefore actual repayment amounts may differ.
10:10am 04/02/2016 - I have added to this post to clarify that Nora is interested in variable rates only for two reasons. Variable rates offer flexibility to pay lump sums off principal, and rates are currently decreasing and may go down further due to added competition in the market.
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