Reduce your mortgage rate without switching

Mike and Kate make a happy picture after paying off their mortgage, but Liam Croke sees another picture - bankers laughing around the table at the huge interest payments

Liam Croke

Reporter:

Liam Croke

Reduce your mortgage rate without switching

Mike and Kate from the AIB ad have paid off their mortgage. You can do the same, quicker and with less interest...

Despite some banks offering cash back incentives and lowering rates to lure people into moving their mortgage to them, the number of people that switch is very small.

According to research commissioned recently by The Central Bank, it was found only 4% of borrowers have moved their mortgage.

Because of this, it is being suggested that banks should set up dedicated teams who would deal exclusively with people looking at moving their mortgage. If this was to happen, it would be welcome, because there are many thousands of mortgage holders who unfortunately have their mortgage with lenders charging nearly 1% more than other lenders. Switching could see a significant difference in their monthly repayments. For example if you owe €300,000 with 25 years remaining, and your rate is 4.3%, switching to a lender with a rate of 3.2% would save you €117 per month, and a staggering €36,735 interest saving over the remainder of the term.

The principal reason to move your mortgage is to avail of a lower rate being charged. There was a time when people would switch their mortgage to another lender because they wanted to consolidate a number of loans into one, release some funds in the process to use for something else but those days are gone.

You can, however, lower your rate without having to move lenders and go through the hassle of completing application forms, getting your house valued etc. Neither will you be depending on a bank to approve your request.

You are in complete control, and can decide how much you want to lower your rate by.

I helped a client of mine only last week reduce her variable rate mortgage by 0.876%, without having to move lenders.

How can you do this without the bank lowering its interest rate? You have no control over the rate being charged, and while that is true, there is something you can do to lower it. This is what you need to do.

My client had a mortgage of €255,000 outstanding, with 25 years remaining, and her monthly repayment is €1,419. Her rate is 4.5% variable, and over the lifetime remaining on her mortgage, if she continues to pay her bank as they want her to, she will repay €230,739 in interest payments.

However, if she was to overpay her mortgage by €200 per month, she would reduce the term remaining by five years. By doing this, the amount of interest she will repay is reduced by €38,596. So, the total amount of interest she will repay is the equivalent of having a mortgage rate of 3.624%.

The secret to a lower mortgage rate therefore is very simple. Overpay on your mortgage each month and you will reduce the effective rate that is being charged to your mortgage. Have a look at the table above where I give you some examples of how much you can reduce the effective rate you are being charged.

Your monthly repayment may still be calculated at 4.3% or whatever rate you have, but over the course of the mortgage, by overpaying, the effective rate based on the total amount of interest you repay is much lower.

I hear people complaining all the time how big the divide is between tracker mortgages and variable rate ones. Yes, there is a big difference, no doubt, but you have the ability to lower that gap by overpaying each month.

And, yes, in the short term you will be paying more each month. But when you think long term - and you should think this way - the difference the rate a bank will be in receipt from you is down to you and not them.

There is a pretty nice TV commercial being run by AIB at the moment showing Mike & Kate on the last day of their mortgage. Clearly they are a really nice couple and have a close family. Showing them on the last day of their mortgage is very powerful and I’m sure they are the envy of thousands of couples who only wish they were finished with their mortgage.

However, when the advert comes on my TV, I see a completely different one. I see smiling faces too, but I don’t see Mike and Kate.

Instead, I see bankers standing around a big table laughing, laughing out loud, clinking their glasses to Mike & Kate because of the amount of interest Mike and Kate paid back to them over probably the last 25 years.

They back brave and effort all right but they are handsomely rewarded for doing so. Too handsomely. When you look at how much they get paid and how much more people in Ireland are being charged than our EU neighbours (about 80% more than the EU norm), it becomes an issue for me.

So, don’t just get angry at your bank, and the rate they charge, because it won't get you anywhere. Harness that anger in a different way, take action by paying down your mortgage much faster than your bank would like you to. In doing so you are lowering the rate of interest you are being charged in the process.

Liam Croke is MD of Harmonics Financial Ltd,

based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie