Why don't more borrowers switch mortgage provider?

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Sarenco

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The banks have told us that the mortgage switcher market in Ireland is very small and I'm curious as why this is the case.

Is negative equity preventing SVR mortgage holders from switching?

According to a Central Bank study published in 2014, 64% of performing borrowers had positive equity in their homes in mid-2012. Given the fact that house prices have risen since mid-2012 and mortgages have continued to be paid down over the last three years, it seems reasonable to assume that the majority of SVR mortgage holders have significant positive equity in their homes.

Is unemployment preventing SVR mortgage holders from switching?

According to the above Central Bank study, 85% of performing borrowers were in employment in mid-2012 and unemployment has fallen somewhat since that time.

Are incomes too low to meet new LTI limits?

According to CSO statistics, median disposable income per individual fell from a peak of €20,758 in 2008 to €17,551 in 2013 (the latest year for which I can find statistics). While there may have been a marginal rise in median disposable income over the last 12 months or so, it seems plausible that lower disposable income will prevent certain borrowers from switching.

Also, the personal circumstances of some borrowers will have changed such that there will have been a material fall in disposable household income (for example, one spouse leaving the workforce to care for children or elderly parents).

Are the costs of switching too high?

Many lenders will make a significant contribution towards the legal costs of switching (e.g. Ulster make a €1,500 contribution) and will often offer other incentives (e.g. free house insurance for a year) such that the net costs of switching are often negligible.

Are the savings simply not worth the hassle?

Obviously any savings will depend on individual circumstances.

To take one example, an SVR mortgage holder with a rate of 4.5% on an outstanding principal amount of €300,000 and an outstanding term of 25 years, will save €45,403 (assuming the interest rate differential remains consistent throughout the term and there are no early repayments of capital) if refinanced at 3.55% (the lowest variable rate currently available). It is worth bearing in mind that this is a tax-free saving.

There is certainly some hassle involved with switching but the potential savings can be very significant.

It seems to me that it is likely that there are tens of thousands of SVR mortgage holders that would very significantly benefit from refinancing their mortgages and are in a position to do so. Breaking this level of customer inertia would inject some much needed competition into the mortgage market, which would be in all our interests as it would free up resources for spending elsewhere in the economy.

Thoughts?
 
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I can only speak for my own situation. Bought in 2007, refused a tracker. Stuck on variable mortgage and high negative equity.
 
Sarenco said:
Are the savings simply not worth the hassle?

Obviously any savings will depend on individual circumstances.

To take one example, an SVR mortgage holder with a rate of 4.5% on an outstanding principal amount of €300,000 and an outstanding term of 25 years, will save €45,403 (assuming the interest rate differential remains consistent throughout the term and there are no early repayments of capital) if refinanced at 3.55% (the lowest variable rate currently available). It is worth bearing in mind that this is a tax-free saving.

There is certainly some hassle involved with switching but the potential savings can be very significant.
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No guarantee at all that the status quo regarding rates will remain in place over the 25 years. KBC bank have some of the best offers available for new customers. However I know of two families, several years in to their mortgages, who are being charged 4.5% ( SVR mortgage) by KBC on their PPR mortgages which is close to if not the most expensive in the market.
 
demoivre said:
No guarantee at all that the status quo regarding rates will remain in place over the 25 years.
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That's certainly true.

Is there any reason why the families in question would not consider re-financing with another lender? For example, Ulster Bank currently offer a Discounted Variable Mortgage <80% at 4% APR (Standard Variable Rate minus 0.40% for the life of the mortgage). Ulster Bank pay a fixed amount of €1,500 towards a switcher's legal fees and also offer a free valuation. I obviously don't know the outstanding amount or term of the mortgages in question but, by way of an example, reducing the rate on a €300k mortgage with 25 years remaining from 4.5% to 4% would result in a saving of €24,144.50 over the term of the mortgage.

If that stops being the best deal available, well switch again!
 
Locked in a fixe rate for another 3 years, with substantial negative equity..will have to assess market opportunity to switch bank in 2019 ! The penalty cost for breaking off the fix rate is higher than potential savings with the lowest rate currently available..besides a high SVR does not make my case a good one for switching to date :-(
 
I have recently gone through the process of switching. Its fair to say it is equivalent to applying for a brand new mortgage, and I believe this is a headache most people would prefer to avoid. I think peoples financial affairs are probably not "mortgage application ready" at a given point in time, and people probably change spending patterns to clean up their accounts before they apply in general.

The cost of switching is also a barrier in my mind, and although while banks offer incentives for this, there is an associated cash flow impact to it as well that needs to be considered.

I also believe that Irish people generally are not financially savvy. We are not good at shopping around for the best deals and have a level of loyalty that is questionable at times - whether it be to utility companies, banks or whatever. Back to the old saying - "the devil you know is better than the devil you don't"

I am also willing to speculate that the people who are likely to benefit most from switching are those who bought after 2009 (when trackers were not available), and a portion now have children (and associated childcare bills) so they may not be offered a mortgage now under the new rules !


My switching process took ~4 months, but that said I am self employed so makes things a little trickier. There was also a legal hick-up along the way around moving the house into joint names. But that said, the move will save me 1500 euro a year (all things being equal) and this is better in my pocket than in the banks !
 
gnf_ireland said:
I have recently gone through the process of switching. Its fair to say it is equivalent to applying for a brand new mortgage, and I believe this is a headache most people would prefer to avoid. I think peoples financial affairs are probably not "mortgage application ready" at a given point in time, and people probably change spending patterns to clean up their accounts before they apply in general.

The cost of switching is also a barrier in my mind, and although while banks offer incentives for this, there is an associated cash flow impact to it as well that needs to be considered.

I also believe that Irish people generally are not financially savvy. We are not good at shopping around for the best deals and have a level of loyalty that is questionable at times - whether it be to utility companies, banks or whatever. Back to the old saying - "the devil you know is better than the devil you don't"

I am also willing to speculate that the people who are likely to benefit most from switching are those who bought after 2009 (when trackers were not available), and a portion now have children (and associated childcare bills) so they may not be offered a mortgage now under the new rules !


My switching process took ~4 months, but that said I am self employed so makes things a little trickier. There was also a legal hick-up along the way around moving the house into joint names. But that said, the move will save me 1500 euro a year (all things being equal) and this is better in my pocket than in the banks !
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Hi gnf

I take your point that the likelihood is that a certain number of borrowers that took out mortgages post-2009 would not meet the necessary underwriting standards to switch due to changed personal circumstances. Having said that, roughly half of all outstanding PDH mortgages are non-trackers so there must still be a very large cohort of borrowers that could and would benefit financially from refinancing their mortgages.

What I find odd is that in the US it is quite commonplace to refinance a home loan multiple times during its term but there appears to be a reluctance to do so here. Closing costs for refinancing a home loan are also generally quite high in the US so that can't be the reason for the difference in attitude. When you consider that the potential savings can run to thousands, if not tens of thousands, of euro over the life of the loan, the level of inertia here seems very puzzling.

I also take your point that cash-flow constraints may be a barrier to switching for some borrowers. Another good reason for maintaining a decent cash reserve at all times is to be in a position to avail of refinancing opportunities when they arise.
 
Performing borrowers stuck with Danske Bank, unable to switch, will be faced with either default or a forced sale when the rates increase again. They d'ont do fixed rates anymore, and have no wish to to compete in this market. They want to exit, so much for New Banks entering the market.

In this country Variable Mortgage holders,are best served by a cap on on the rates, or good value fixed rates as in modern democracies.

In this free market, consumers d'ont seem to get value.High medical costs, high utilities costs, high Childcare costs, etc etc ..... and very very High mortgage costs.

So competition alone is not the answer,switching is not going to fix the problems, a holistic solution to a complex problem is needed in this not so competitive market.
 
gnf_ireland said:
I am also willing to speculate that the people who are likely to benefit most from switching are those who bought after 2009 (when trackers were not available), and a portion now have children (and associated childcare bills) so they may not be offered a mortgage now under the new rules !
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This was the case with us when I spoke to KBC - we have low LTV and our current mortgage payment is reasonably manageable compared to our income, but KBC wouldn't offer us enough to switch, presumably because we have kids. Most they could give us was about 2.5 times income when we were looking for 3 times.
 
shweeney said:
This was the case with us when I spoke to KBC - we have low LTV and our current mortgage payment is reasonably manageable compared to our income, but KBC wouldn't offer us enough to switch, presumably because we have kids. Most they could give us was about 2.5 times income when we were looking for 3 times.
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KBC certainly appear to have relatively strict underwriting criteria, which presumably explains why they can offer the lowest variable rates in the market.

Have you tried any other lenders? For example, Ulster Bank have a fairly decent switcher offering for relatively low LTV borrowers. It's worth the effort, in my opinion, as even a 0.25% reduction in a variable mortgage rate can represent a very significant saving over the lifetime of an average home loan (whatever Shane Ross might say!:p).
 
Sarenco said:
KBC certainly appear to have relatively strict underwriting criteria, which presumably explains why they can offer the lowest variable rates in the market.
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And as already pointed out KBC Charge some of their SVR mortgage holders the highest rates in the market ie 4.5%.
 
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demoivre said:
And as already pointed out charge some of their SVR mortgage holders the highest rates in the market ie 4.5%.
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Fair enough but is it not case that an SVR of around 4.5% is pretty standard across all the banks? Interestingly, the SVR across the UK mortgage market also hovers in or around this figure (although I would guess that the % of borrowers at this rate is relatively low).

Incidentally, I agree that some legal protection from price gouging is warranted for borrowers that are not in a position to refinance their loans (whether due to negative equity or income constraints) and I have suggested a formula in this regard on another thread.
 
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demoivre said:
Every mortgage has a LTV ratio.
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Well, yes, I suppose that's true but an LTV mortgage normally refers to a mortgage where the initial interest rate is determined on the basis of the LTV ratio at the time that the home loan is advanced. In contrast, the SVR is the "default" variable rate that applies regardless of the LTV ratio.

Some lenders (e.g. Ulster Bank) actually describe their LTV mortgage rates as reflecting a certain discount to their SVR throughout the term of the loan.

From memory, Bank of Ireland, PTSB, Ulster Bank and KBC all have an SVR of 4.5%. Danske's SVR is somewhat higher and AIB's SVR is somewhat lower (or at least it will be when the recently announced reduction takes effect).
 
According to figures recently published by the IBF, there were a grand total of 172 mortgage refinancing transactions in the first quarter of this year and 503 in all of 2014.

Those figures are stunningly low when you consider that there are tens of thousands of SVR mortgage holders that would very significantly benefit from refinancing their mortgages and are in a position to do so.

Are people really that keen on paying inflated variable interest rates to their lenders? And we wonder why SVR rates are so high in Ireland...
 
The main blocker is the legal fees. At best for a switch they are about 1k. I have no clue what needs to be re-checked but is there an argument for tackling this fee like within a certain timeframe or something ? I'm sure there are very valid reasons for the cost but just curious as to why if everything is in order first time around why the cost to switch is not far off the original seeing as the bank don't insist on an update of the legal state of a house every year or so.
 
elcato said:
The main blocker is the legal fees. At best for a switch they are about 1k. I have no clue what needs to be re-checked but is there an argument for tackling this fee like within a certain timeframe or something ? I'm sure there are very valid reasons for the cost but just curious as to why if everything is in order first time around why the cost to switch is not far off the original seeing as the bank don't insist on an update of the legal state of a house every year or so.
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PTSB, Ulster Bank and KBC will each make a contribution of between €1,000 and €1,500 towards the legal costs of switching and Bank of Ireland will give a switcher cash back equivalent to 1% of the amount of the loan. In addition, some lenders will offer other incentives to switchers, such as free house insurance for a year.
 
The Sunday Business Post reports today that, based on recently published IBF data, mortgage switches quadrupled in the first three months of 2015 compared to the similar period in 2014. However, the amounts involved are tiny - only €41 million out of the near €1 billion in mortgages drawn down in the quarter were switcher mortgages.

I think it should be relatively clear from the events of the last few days that a political campaign with rather vague, unfocused demands regarding variable mortgage rates is unlikely to yield significant results. However, it is equally clear that there is a very significant cohort of non-tracker, variable rate mortgage holders that are not availing of the substantially lower rates available to switchers.

There is no doubt that an active switcher market would drive down variable rates accross the board as lenders would cut their rates to retain performing mortgages on their books. At an individual level, switching mortgage providers is a far more effective strategy than lobbying politicians.

As always, the gods help those that help themselves.
 
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