Cashback can cost more in the long run
Don't fall for providers' sweeteners make sure you look closely at the real deal - Mark Channing
Home buyers who choose mortgage providers based on cashback incentives risk paying dearly for it in the long run, mortgage experts have warned.
Last week Permanent TSB unveiled a mortgage deal offering new customers 2% cashback on a mortgage - worth €6,000 on a €300,000 loan. The deal matches that of Bank of Ireland, which was the first mortgage provider to give 2% cashback.
Other lenders give cash incentives, too, but the amount is capped. Ulster Bank gives mortgage customers €1,500 while KBC Bank gives switchers €2,000 plus a 50% discount on home insurance for one year.
However, mortgage experts say home buyers risk getting stuck with an expensive mortgage by allowing themselves to be blinded by offers of free cash and other sweeteners.
Ken Murray of the Association of Expert Mortgage Advisers said: “An apparently lucrative offer could end up costing you in the long term. You can't take an offer at face value - you must see what's behind it and start asking questions.”
We put lenders' mortgage deals to the test and examine what other seemingly good deals could cost you more in the long run.
Choosing lenders based on cashback and other incentives could cost you thousands of euros in extra interest over the life of the loan. Take the 2% cashback from Bank of Ireland and Permanent TSB. Suppose you borrow €250,000 over 30 years to buy a house worth €320,000. Permanent TSB and Bank of Ireland would give you €5,000 cashback. However, you could end up paying far more in interest as they are among the most expensive lenders.
Bank of Ireland charges 4.2% variable-rate interest for mortgages with a loan-to value (ITV) of up to 80%, while Permanent TSB would charge 4%. This contrasts with KBC's 3.45% for the same mortgage.
The interest differential might not seem much- until you see what it costs you over the life of the loan.
Assuming the gap persists for the 30 years of the loan, Bank of Ireland would charge you €32,000 more than KBC even allowing for the €5,000 cashback.
Bank of Ireland customers could narrow the interest gap by opting for a cheaper fixed rate of 3.6%-3.75% for two years, 3.6%-3.8% for three years, 3.8%-3.95% for five years or 4.2%-4.4% for 10 years, depending on the amount borrowed and the value of their homes.
However, this is only a temporary solution. Fixed rates are usually dearer than variable rates. Experts say that, at some point, fixed-rate mortgage holders will probably end upon their bank’s variable rate.
Michael Dowling, chairman of the Irish Brokers Association's mortgage committee, said: “When you come to the end of the fixed-rate period, you can fix again or go on the bank's standard variable rate. If Bank of Ireland's fixed rates are not competitive at that time, you may have no choice but to go on its variable rate."
Some banks reward you for giving them your current account business in addition to your mortgage. Allied Irish Banks waives its €4.50 quarterly account maintenance fee and transaction fees if you pay an AIB mortgage from an AIB Current account.
KBC gives a 0.2-point cut on your mortgage interest rate if you lodge your salary to its current account and pay the mortgage by direct debit.
Mortgage experts say these incentives are banks' attempts to make you a customer for life.
Less than 1% of current account holders switch providers so, once banks get your business, they know you will probably never leave. They then make money by cross selling other financial products such as loans, overdrafts, credit cards and insurance.
Experts say it is important to know the bank's agenda. “There's no disadvantage to having your current account and mortgage with the same provider, as long as you shop around for financial products,” said Murray. “The moment you get lazy is the moment that will cost you.”
Choose energy providers based on discounts - not switching incentives.
Last week Bord Gais Energy announced €100 cashback for new electricity customers, on top of a 10% discount off its standard unit rates.
Non-cash incentives can also be a false economy. For example, new Electric Ireland customers can get a device called Climote worth €399 that allows them to control their heating using a smartphone. However, customers pay for the Climote in the form of higher bills because, to get the device, they must sign up for Electric Ireland's standard unit prices for two years rather than its discounted tariff for new customers. The discounts are worth more than €600 over two years to dual-fuel customers with typical consumption patterns.
Simon Moynihan of price comparison site bonkers.ie said: "For a typical energy customer, it's cheaper to pay for the Climote separately. You need to make sure you are getting the best switching discount each year.”
Households have to do their homework before deciding if an incentive is worth it. The Commission for Energy Regulation forbids price comparison websites from including the cash value of switching incentives when ranking providers.
Permanent TSB, KBC, Tesco and Bank of Ireland have interest - free deals on credit card balance transfers - but don't assume they are the best value.
Balance transfers make sense only if you clear the debt before the interest-free period expires. “If you're not prepared to clear your balance within this time, you could be better off going for a card with a higher APR,” said Moynihan.
Suppose you owe €5,000 and you plan to pay it off over 12 months. Permanent TSB's Ice card would charge no interest for the first six months and an annual rate of 20.7% interest for the second six months - €182 in total. But you could save about €80, excluding fees and charges, with AIB's Be card, with a low rate of 3.83% interest for 12 months.
Credit card providers also reward you. KBC gives 1% cashback for grocery and online purchases, while Tesco gives Clubcard loyalty points.
However, unless you clear the balance every month, these rewards would be worth less than the interest. KBC and Tesco charge 18.25% and 19.1% interest on purchases respectively, AIB's Click card charges 13.6%.