January 2016 Update: permanent tsb announced that they will offer 2% cashback on mortgages underwritten by June 30th 2016. Is frenzied lending back?
However little you feel you know about personal financial matters, there is one rule you are sure about.
Thou shalt switch
Because of the sheer barrage of messaging around personal finance, we have been well educated on the notion of shopping around. We have been brainwashed to view switching as good. The problem is that the warm fuzzy feeling attached to doing the right thing, coupled with the apparent bonanza of the switch offer can cloud our judgement. Acting on our own flawed logic, we can often end up paying more in the long run in the pursuit of apparent offers and deals.
Bank of Ireland’s 2% cashback offer
So, let’s say you have a mortgage with AIB (for example) with €370,000 still to pay. The 2% cashback Bank of Ireland offer is following you across the internet. Everywhere you look it’s there, and it seems like a great offer. 2% of €370,000 is €7,400. Not to be sniffed at!
You can opt to fix, part-fix or go for the variable rate, which right now ranges from 3.9% to 4.5% APR depending on your Loan To Value ratio – the higher end of the variable rates out there. The offer requires you to commit to the bank for five years – if you switch to another provider within that time or repay the mortgage early, you may be required to pay back the entire 2%.
“A word of warning here. This is a marketing tactic by Bank of Ireland to increase market share. Just because it exists does not mean it will be good for you. For some people, this offer will be a rather troublesome route to an overdraft – you’ll get your cash injection, but will be paying it back in high interest rates for the next few years.”
I’m not saying it won’t benefit anybody, but to figure out if this offer is great for you requires a little bit of work.
The first thing to say is that if are moving an existing mortgage, there are costs associated with switching. You may need to have a valuation carried out and there will be legal costs – allow around €1700 for these elements.
Take those costs off your €7,400 and you’re left with €5,700. Still a sizable incentive to go through with it.
Next thing is to look beyond the cash incentive at the rates on offer because that’s where the truth lies. Bank of Ireland’s variable rates are on the high side, so fixing for a period might seem like the best option. Bear in mind that after your initial fixed term is up, you are no longer a new customer so the rates you will be offered – both fixed and variable – will be higher.
There are many ways to skin a cat; what if you went with a twin rate (part fixed, part variable), fixing, say, 70% of the loan with 30% on the variable rate? How does that leave you? You just need to run the figures to see how much more or less you will pay than with your current lender.
Get independent advice
It’s one thing switching an annual insurance policy from one provider to another for a ‘free gift’ or incentive that didn’t turn out to be worth it over the course of the commitment, but when the commitment is a 20 or 25-year mortgage, you really need to carry out due diligence on that offer.
This is where an hour spent with an independent financial planner is money well spent. We are wired to think in terms of short-term gains but a Certified Financial Planner is trained to focus on long-term financial goals, and there are few more long-term financial commitments than your mortgage. He or she will help you see the wood for the trees in these too-good-to-be-true offers. It’s a very noisy marketplace, with all the financial institutions clamouring for your business. Bank of Ireland’s new offer to give you 2% of your mortgage back in cash is a marketing ploy to get attention in the marketplace.
I’m not saying that Bank of Ireland’s 2% cash back offer isn’t right for you. What I am saying is that it is a big decision with far-reaching implications. If cash is important to you right now, and the total cost of your mortgage over the long-term is not an issue, it may indeed be worth the switch but you really should get proper, independent advice (ie not from your mortgage broker) before embarking on any ‘big switch’.