The number of people switching mortgages rose by 105.1% in the three months up to January 2016. We look at the factors that are causing this dramatic increase, including the Central Bank's mortgage lending rules and the recent spate of variable interest rate cuts.
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In 1879, Michael Davitt founded the Irish National Land League and spent the following years passionately pounding pulpits up and down the country, demanding the right to land ownership for Irish tenants.
Over a century later, we live in a basically unrecognisable Ireland to the one Davitt left behind, but the issue of owning an abode remains a pressing, challenging and emotive one for Irish people.
It is a hot topic at government level too, with Fianna Fáil, Fine Gael and Labour all making mention of the the Central Bank’s mortgage lending rules in their recent election manifestos.
It is these same rules, introduced in February 2015 to take the heat out of the property market, that are now having a substantial effect across the country.
Mortgage drawdowns have fallen by 14.7% in the three months up to January 2016, and First-Time Buyer drawdowns are a massive 23.1% lower than they were last year. But switching has doubled! More on that later.
It is becoming increasingly difficult for a young family on the average industrial wage to take their first steps on the property ladder, and it is the Central Bank’s rules that are generally seen as the primary cause of the market slowing down from a sprint to a crawl.
What Are the Central Bank’s Lending Rules?
The current Central Bank rules restrict the loan-to-income ratio for a prospective property buyer to three-and-a-half times their annual income.
So, if you earn €40,000 a year, you can buy a house with a maximum value of €140,000. If you’re buying with a partner who also earns €40,000, that amount doubles to €280,000 of course.
But to make matters a little more challenging, banks usually don’t consider bonuses and commission to be part of your income. And when they do, they tend to only consider a portion of it. So, if your salary is largely made up of performance-based income, you might be in for a surprise at how much you can actually borrow.
The second major change the Central Bank brought in last year was a change to the loan-to-value ratios on offer. This refers to the percentage of the property’s value that you can borrow and how much of it you must pay for up front, in the form of a deposit.
The new rules state that First-Time Buyers can borrow no more than 90% of a property’s value, up to €220,000. So, if you’re a First-Time Buyer, you must provide 10% of the property’s value in the form of a deposit. After the €220,000 threshold, the loan-to-value ratio goes to 80%, meaning you must pay a challenging 20% of the remainder in the form of a deposit.
So, to continue with our example of a couple looking to buy a house valued at €280,000, they could borrow 90% of the first €220,000 and 80% of the remaining €60,000. So, they would need to provide the remainder as a deposit of €34,000 (€22,000+€12,000).
And what about non-First-Time Buyers? Well, they all have to provide a 20% deposit to buy a new home.
It’s important to note that banks do allow a certain amount of exceptions to these rules every year, but you’ll need to shop around to find out which banks are still offering flexible options, and which have used all of theirs up.
Are the New Rules Working?
These rules seem to have had the desired effect in slowing down the property market, but at what cost?
With many people unable to get on the home-ownership ladder, demand for rental properties has sky-rocketed, in the capital in particular. In fact, rents have been on the rise for 14 consecutive quarters now, with the average rent in Dublin standing at €1,435.
Switching is a Salvation for Some
Despite the challenging housing situation faced by a large proportion of of the population, there are new options gradually emerging. Namely, switching.
The latest Banking & Payments Federation Ireland (BPFI) figures show that mortgage switching more than doubled in the three months up to January 2016. An increase of 105.1%, to be exact.
Despite Ireland’s average mortgage variable rate still being much higher than the euro zone average of 1.99%, there have been some noteworthy cuts over the past 12 months.
AIB cut its rates by 0.25% in August, Ulster Bank knocked 0.3% off its rates in September and KBC followed with a 0.25% cut of its own in October.
Cuts such as these have brought the average variable rate in Ireland down from 4.2% to 3.76% in the past six months. And customers are starting to take notice and make the switch.
How Does Switching Mortgages Work?
The first thing to establish when considering switching mortgages is whether or not making the move would actually save you money. If you’re on a tracker rate, for example, you wouldn’t save by switching.
The best way to find out if you would save money is by visiting our Compare Mortgages page.
If you could save by switching, great! But unfortunately, not everyone is eligible.
If you’re in negative equity, have had arrears in the past 12 months or have less than €30,000 left on your mortgage, you cannot switch.
But if you are eligible, you can take your pick of a new bank and rate from our Compare Mortgages page and arrange a call with a qualified mortgage expert who will talk you through the entire switching process.
According to Dave Curry of the Irish Mortgage Corporation, “switching has never been easier, and many of the banks are offering cash incentives to cover the costs involved”.
Rates as low as 3.2%, plus legal fees allowances of up to €2,000 are now on offer, meaning that you could save tens of thousands of euro over the course of your loan. And I don’t know anyone who couldn’t do with that type of cash back in their pockets!
In fact, according to Curry, “there are savings of up to €32,633 available for a mortgage of €200,000 with 20 years remaining…and savings are even bigger for those with a larger mortgage balance, or a longer term to completion”.
Slowly Moving in the Right Direction
Although rates still have a long way to fall before they even reach the euro zone average, they are moving in the right direction. And it’s good to see such large increases in the number of savvy consumers following the falling rates by switching mortgages.
As Fianna Fáil and Fine Gael begin talks about the formation of a new government, it will be interesting to see the extent to which mortgages will be a negotiation battle ground between the two.
The party of Collins and Kenny is keen to introduce a standardised switching form and code of conduct to encourage borrowers to move between banks and avail of savings.
Meanwhile, Fianna Fáil wants to empower the Central Bank to “force” banks to lower rates and to introduce a 25% ‘top-up’ for First-Time Buyers who are saving for a deposit.
The issue of home ownership remains at the heart of the national conversation and, as the market seeks to find a sustainable rhythm following the turmoil of the last decade, we hope to see further falling rates and an increase in switching over the coming months.