Four mortgage areas for Limerick homeowners to monitor

IF I was to ask you, what interest rate is being charged to your mortgage, would you know the answer?
I hope you do, because a mortgage for most of us is probably the biggest debt we will ever take on in our lifetime.
And even though the interest rate might be a reasonably low one, it is the one debt we’ll pay back the most in interest payments simply because of the length of time we’ll be paying it.
And I’m going to tell you about a survey that was carried out by the Competition and Consumer Protection Commission (CCPC) a number of years back because I’m not sure a similar one has been done in recent years.
And I wanted to refer to this study because it's relevant to what I want to talk to you about.
Because their study at the time discovered that only 52% of respondents claimed to know what interest rate was being charged on their mortgage.

READ MORE: How the Beckham Law can benefit if relocating for work from Limerick to Spain
The same study also uncovered that 82% of those surveyed knew what their monthly repayment was.
And I am assuming the % is higher in this instance because people can easily see what amount is being debited from their current account each month.
So, if we know what our monthly repayment is, then do we really need to know what interest rate our mortgage is being charged at?
And if we don’t know, is it OK to continue to ignore it?
And before I answer these questions, let me tell you first tell you about what I think are the four things that matter most when it comes to your mortgage and yes you guessed it, of course one of them is the interest rate.

The four are:
1. The amount you borrow
2. The rate of interest
3. The term of your mortgage
4. And your monthly repayment

All four have an impact on the total amount of interest you will end up paying, and all four are things you can control and change, and here is the important thing to know - if you can change one, it will have an impact on the others.
For example, if you can reduce the interest rate the knock on effect is that
-your monthly repayment will go down and,
-the total amount of interest you repay will also reduce.
If, for example you borrowed €327,972 (this is the average mortgage amount in Ireland in the first quarter of this year) over 25 years (this is the average mortgage term in Ireland) at an interest rate of 3.77% (and this is the average mortgage interest rate in Ireland) your monthly repayment will be €1,690 and the total amount of interest you repay, €178,962.
If you reduce the interest rate by 0.5% then your monthly repayment will reduce to €1,602 and your interest payments to €153,546. So, in this example the impact of lowering your rate by 0.5% means you’ll reduce two things.
-your monthly repayment by €88 and
-your total interest payments by €25,146.
And can you reduce the average interest rate being charged by .50%, and the answer is yes you can. There are interest rates available right now as low as 3%.
Let’s make another change.
What if you alter your monthly repayment by increasing the amount you repay each month by say €150.
That means you’re making a voluntary overpayment and if you were to do this and we use the same numbers i.e. mortgage of €327,972 over 25 years at 3.77%, two things will happen.
-the term of your mortgage will reduce by three years and two months
-the amount you repay in interest will decrease by €25,370
Let’s make another change.
How about we reduce the term of the mortgage and rather than choosing a term of 30 years, we choose a 20 year term instead.

READ MORE: Limerick financial advisor outlines how sufferers of a certain illness can claim tax relief
The consequence of doing this is that your monthly repayment will obviously be higher i.e. an extra €258 per month more than if you chose a 30 year term, but the amount you could end up saving in interest payments is €39,432 because you’re paying the mortgage back 10 years quicker.
In an instance like this you’ve got to ask yourself (a) can you afford the monthly repayment over the shorter term and (b) are you happy to perhaps stretch yourself with the repayments in the short term for that long term reward of having a mortgage paid off over a much shorter period of time.
And you have to run the numbers because it may be hard to find that extra money each month and it’s easier from a cash flow perspective to take the easy option and take out a longer term, but I have come across people who challenge themselves with a shorter term and you know what?
They get used to their monthly repayment and adjust their budget accordingly and even the difference in someone saying there is 12 years remaining on their mortgage instead of saying 22 is huge.
And all because they didn’t take the easy route.
The options it gives them in the future only confirms that the hard work was worth it, because they can maybe retire earlier because their mortgage is repaid or they can work for a lower salary and work at a slower pace, all because they don’t have to make an additional 120 monthly mortgage repayments.
I have said it before and I’ll repeat myself, the lending industry has in my opinion succeeded in doing two things.
The first is dictating how long a person can have a mortgage for and the second reason is influenced by the first.
And that is getting borrowers to focus on monthly repayments which become smaller the longer you have a mortgage for.
When you only focus on this the borrower avoids having to look or be concerned about the total amount of interest they’ll end up repaying.
And that might explain why again according to the CCPC that only 15% of mortgage holders have considered switching their mortgage in the past five years.
And when asked why they didn’t give it much thought, the majority said they didn’t think it was worth their while.
It has been proven in countless studies that we make judgments like this, when we view the savings as a proportion of the total amount we repay each month and this is known as relative thinking.
We also factor into our thinking not just the financial saving but the value of our time and if the effort is big where we are committing ourselves to future work like getting the house re-valued, completing application forms, gathering bank statements etc. all of which admittedly are a pain in the ass.
And then we won’t really see the saving until the mortgage is repaid in full, so the saving isn’t instant or big enough for some of us.
And that is the crux of the problem.
We are only comparing the difference from switching lenders to lower monthly repayments which may run into the tens of Euros in monthly savings and not in the total amount of interest we end up repaying which could run into the tens of thousands.
If we front loaded the saving and the total amount of interest we save was lodged into our account would we mind getting salary certs completed then? I don’t think so.
But that’s not going to happen either.
What needs to happen is a change in our mindset where we look at the long term savings and be happy with them even if we don’t feel their impact for 10 or 20 years’.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie