Probably the biggest financial frustration facing Irish consumers today is the knowledge that the European Central Bank’s (ECB) main interest rate is now at zero, yet this is simply not being reflected in hundreds of thousands of mortgages in Ireland today.
While all of those people who opted for tracker mortgages during the boom years have seen the cost of their mortgages fall with the ECB rate, this has not happened for everyone else. Tracker mortgage costs today average out at an interest cost of about 1% p.a., whereas the average cost of a variable rate mortgage is about 4%. This makes an enormous difference to borrowers – being charged approx. €3,000 extra p.a. for each €100,000 borrowed.
One question we’re often asked is how this compares to other countries. And the answer is that the Irish banks are fleecing variable rate borrowers, charging them almost 2% more than the euro zone average. Why? Because they are losing money on tracker mortgages (that they handed out) and this is the only way they can recoup some of their losses and repair their balance sheets. And because they can; there is no law or regulation to stop them from raising these rates.
What can consumers do?
The first thing consumers can do is to actively try to switch their mortgage in search of a better rate. It amazes us how few people try to move.
There’s no doubt that people are put off by the amount of paperwork involved (we can help you here!) and also by the thought that they will incur cost in switching their mortgage. However a number of lenders have offers today to entice switchers; these range from 2% cashback, to a contribution towards your legal fees and reductions in interest rates and your home insurance. In fact a recent report by the Central Bank said that borrowers would recover 70% of their outlay within the first year alone – so not switching on cost grounds just doesn’t stack up.
The main issue why people don’t switch is simply inertia; people just don’t bother.
In 2015, less than 1,500 mortgages valued at under €300million were switched, out of a total amount of new loans of almost €5billion. A drop in the ocean. Compare this to Italy where roughly one third of new mortgages were switches.
Of course it would make no sense for tracker mortgage holders to switch, and there are many people that might want to switch but can’t, because they are in arrears, are on a fixed rate, are in negative equity or other such reasons.
So we’re calling on all Irish variable rate holders – if you have a variable rate mortgage and are in a position to switch, you should definitely be investigating it! The worst-case scenario is that your current lender will probably lower your rate when you show them you’re serious about moving.
What else can be done?
There are calls now for legislation or even a code of conduct that would enable variable rate mortgage holders to easily switch to an alternative lender. The current complexity of the transaction and the hoops you have to jump through all play straight into the hands of the bank. Indeed even providing consumers with better information would be helpful. Unfortunately we’ve learned not to hold our breath, waiting for such regulations to be imposed on banks.
At the end of the day, making this happen falls back individually on each variable rate mortgage holder. If you want to potentially save thousands of Euros each year, you’re going to have to take action yourself. And that might be as simple as giving us a call at 01 8015808 and letting us do the work for you. Which do you want – pay your mortgage each year or pay your mortgage and afford a holiday each year? That might be your choice!