Key Post How to evaluate the decision to switch lenders

[Brendan Burgess]

It will cost you around €1,500 to switch lenders. Most lenders offer a towards this.

You should calculate how much interest you will save from switching and then see how many months or years it will take to recover the initial costs.


Example 1
Mortgage €200k
House value €250k
Term remaining: 20 years
Loan to Value: 80%
Current lender: permanent tsb SVR at 4.5%

KBC offers a rate of 3.69% for borrowers with an LTV of less than 80% who switch their current account to KBC.

KBC will pay €1,000 towards your legal costs, so the net cost of moving is €500.

Here is the correct calculation:

Current annual interest: €200k @4.5% = €9,000
New annual interest: €200k @3.69% = €7,380
Interest saved in first year: €1,620
Monthly saving in interest: €135
Less higher fees on KBC current account: €10 per month (Assumed for the purposes of illustration)
Monthly net savings from switching to KBC: €125 a month.

As the net cost of moving is only €500, you will recover this cost in 4 months.

This makes switching a clear decision.

Looking at the savings over the life of the loan will give you a misleading answer

Some people reason as follows:
"If I switch from Bank of Ireland to AIB, I will save €50 a month in repayments for 20 years. That is €12,000, so it's well worth the €1,500 cost of switching."

This is wrong for a number of reasons.
1) You should be looking at the interest charged rather than the repayment.
2) You should check that you are getting the best rate at least annually. In a few months, other lenders may bring down the rates, so you might be better off switching to KBC. If you switch now to AIB and then to KBC after 6 months, the switch will have cost you money.
3) Even if the rate difference between AIB and BoI remains constant, there is a good chance that you will repay your mortgage early e.g. if you are trading up.
4) The €12,000 is a mixture of 2015 euros, 2016 euros, etc down to 2035 euros. Each of these have different values in today's terms and should not be added together.

Example 2

Cost of moving: €2,000 and there are no incentives from the lender.
Mortgage is €100,000 with 30 years left.
Current Interest rate: 5.1%
If I switch, I can get an interest rate of 5%
Annual interest saved: €100 ( €100,000 @ 0.1%)
Number of years required to recover initial costs: 20

It's clearly not worth spending €2,000 to save €100 a year.

(In fact, it would take even longer to recover the €2,000 as the interest charged reduces each year, as you repay capital)


Before you switch, try to bring down the Loan to Value ratio of your mortgage?

For example, if your mortgage is just over 60% Loan to Value, it may be worth piling in all your savings to bring the LTV below 60% as it should result in a lower rate for the full remaining term of the loan.

Looking at the reduction in repayments will give you a misleading answer

You should look at the reduction in interest paid, not at the reduction in repayments.

Current monthly repayments on €200k @4.5% over 20 years: €1,265
New monthly repayments on €200k @3.69% over 20 years: € 1,179
Monthly reduction in payments: €86
Less higher current account fees: €10
Net monthly reduction in mortgage payments: €76

It would take almost 7 months to recover €500 at €76 a month.

This is the wrong answer because of the way mortgage payments are calculated. Although you save €125 a month in interest, €50 of this saving goes to repaying the capital on your mortgage. So at the end of the year, you will have saved €1,032 in actual repayments, but your mortgage balance will actually be €600 lower as well.

 

[Brendan Burgess]

Switching legal fee contributions:
BOI - 1% of mortgage value
UB - 1.5K
KBC - 1K + 50% off KBC home insurance
PTSB - 1K
AIB - 0

Thanks to shweeney for compiling this and to Sarenco for updating it.

 

[Sarenco]

Switching legal fee contributions:
BOI - 1% of mortgage value up to max 5K
UB - 1.5K
KBC - 1K
PTSB - 1K
AIB - 0

Thanks to shweeney for compiling this.

The above omits KBC's additional incentive whereby they offer 50% off KBC Home Insurance for new residential mortgages.

Also, I don't believe the 1% cash back offered by BOI is capped at €5,000 as suggested.

 

[Sarenco]

Hi Brendan

I would disagree with a number of aspects of your analysis.

Firstly, the example ignores the fact that KBC offer 50% off KBC Home Insurance to switchers. This would typically be worth around €250 to most borrowers, which would half the net cost of switching to around €250 and would reduce the payback period to around two months.

Secondly, why assume that there would be higher current account fees? The quarterly maintenance fee is only €6 and otherwise KBC's current account is very competitive. Switching to KBC's current account could just as easily result in a saving of €10 per month.

Thirdly, AIB are not active in the switcher market so why include them in the discussion?

More fundamentally, I disagree that looking at the savings over the lifetime of the loan is misleading. What other timeframe should be used? I would suggest that looking at the interest savings over any other random time period would actually be misleading.

A reduction of 0.81% (4.5% - 3.69%) in the interest rate charged on €200,000 over 20 years will result in a saving of €19,765.23 in interest payments over the life of the loan. The savings will be most significant early in the remaining loan term and will gradually taper off as the principal amount is repaid.

In is certainly true that it is highly likely that €19,765.23 in 20 years will be be worth less in today's terms due to inflation but equally the net cost of switching will reduce in real terms.

It is also obviously true that you cannot be sure that the 0.81% rate differential will be maintained over the term of the loan. However, even if you had to switch providers a number of times to maintain a rate differential you would still make material savings if the aggregate cost of switching is less than the interest saved.

I don't understand the discussion on capital repayments - what does an interest saving have to do with capital repayments? Obviously repaying a loan in full will result in even greater interest savings!

 

[gnf_ireland]

Hi
as someone who has just come out of the switching process, can I make a few suggestions on both how to minimise the impact cash flow wise of the switch, as well as the way I calculated the benefit of switching

Of course, all of this depends on the individuals personal financial situation, so will put that caveat on it.

I used the following site to calculate the current cost of the mortgage per month

I then used the same site using the new rate, and also using the new rate and overpaying each month by the difference between the old and new rates. All pretty straight-forward really.
The net effect is the change of interest rate would save me ~125 euro a month, everything else remaining equal. That is cold hard cash in my pocket each month for the next while - or 1500 in a year.

I understand the position the two guys above are making so let me see if I can give a concrete example (not my own figures)
Mortgage of 250k with BOI @4.35% for 20 years. Repayment = 1561 a month and after 5 years the outstanding amount is 206,173
Mortgage of 250k with KBC @3.55% for 20 years. Repayment = 1456 a month and after 5 years the outstanding amount is 203,018
So there is a monthly saving of 105 euro a month (1260 a year) and you have also paid down 3,155 more of the mortgage balance in the 5 years under the new arrangement. So it is not all about the 105 a month - there are benefits on the outstanding amount as well.
*note* the calculator also shows you the yearly amortisation of the mortgage just below the repayment figure

Now if you went a step further and used that 105 extra to overpay the mortgage, you would save 1 year 11 months from the mortgage term, but by year 5 the outstanding balance is now 196,115 - 10,058 euro extra paid off the mortgage in 5 years.

So my personal view, for what its worth, look at a 5 year view and what the return would be over a 5 year period and assess the switch based on that. Also consider if you can overpay the mortgage by the amount your mortgage reduces by.


In terms of costs of moving - yes this can cause cash flow issues for some people. One thing I did notice was KBC gave me the 50% off the house insurance early (before I has signed the letter of offer) - although there were delays on their side at the time. My BOI mortgage was paid on the 20th of each month, and KBC wanted payment on the 1st, so I took an 'effective' break in the mortgage repayments in May and first KBC payment today - in reality a 10 day break. My last BOI one was 20th April. The first payment also is 1000 lower than the remainder (switching bonus), and the solicitor's bill has not come yet, so this does assist cash flow issues if people have concerned here.

Hope this helps people thinking of switching

 

[Brendan Burgess]

The above omits KBC's additional incentive whereby they offer 50% off KBC Home Insurance for new residential mortgages.

Also, I don't believe the 1% cash back offered by BOI is capped at €5,000 as suggested.

Thanks.

I have updated the table accordingly.

Not sure how much the 50% off the home insurance is worth. Usually insurance arranged through a bank is far more expensive anyway.

 

[Brendan Burgess]

Thirdly, AIB are not active in the switcher market so why include them in the discussion?

When you say that they are not active, do you mean that they refuse to take borrowers from other banks?

As it happens, that was just an example, to illustrate how to approach the calculation. The figures will be different for each case, as the amounts and the lenders and the rates will be different.

Brendan

 

[Brendan Burgess]

More fundamentally, I disagree that looking at the savings over the lifetime of the loan is misleading. What other timeframe should be used? I would suggest that looking at the interest savings over any other random time period would actually be misleading.

A reduction of 0.81% (4.5% - 3.69%) in the interest rate charged on €200,000 over 20 years will result in a saving of €19,765.23 in interest payments over the life of the loan. The savings will be most significant early in the remaining loan term and will gradually taper off as the principal amount is repaid.

OK, I will see if I can explain this a bit better.

Let's say that the only choice I have is between a rate of 4.5% fixed for 20 years or 3.69% fixed for 20 years. Then your calculation would be less wrong. I would have a saving of 19,765.23 ( They are not all the same thing as a euro today is very different from a euro in 2035 - but leave that aside for the moment.)

But when I change mortgage, it's not a 20 year decision. It's a decision which I should review periodically. Lots of things can happen which change the calculation

• AIB may become more expensive
• BoI may become cheaper
• Another lender may become cheaper again, so I switch to them.
• I may overpay my mortgage, so the savings would be a lot less.
• I may extend the term of my mortgage so the savings may be a lot more

Let me give you an example to illustrate why looking at the savings over 20 years is wrong.

Let's say that the cost of moving is €2,000 and there are no incentives from the lender.
Let's say that the mortgage is €100,000 with 30 years left.
Let's say that I am paying 5.1%, the repayments over the life of the mortgage will be €195,461
but I can switch lender and get a rate of 5%, and the repayments will be
only €193,255
The saving, according to your calculation, is €2,206 which is more than €2,000 so I should switch.

I would argue that the annual saving in interest this year will be €100, so it would not be worth paying €2,000 up front for such a paltry saving.

 

[Sarenco]

Thanks.

I have updated the table accordingly.

Not sure how much the 50% off the home insurance is worth. Usually insurance arranged through a bank is far more expensive anyway.

Thanks.

For completeness, it may be worth mentioning that certain brokers, such as the Dublin Mortgage Company (no affiliation), will meet all costs associated with switching in certain cases and will pay all premiums for a year's home insurance.

The suggested premium saving was based on what gnf reported on another thread but I have separately made some enquiries and the home insurance offered by KBC certainly seems competitive to me.

 

[Sarenco]

When you say that they are not active, do you mean that they refuse to take borrowers from other banks?

As it happens, that was just an example, to illustrate how to approach the calculation. The figures will be different for each case, as the amounts and the lenders and the rates will be different.

Brendan

Well, AIB don't advertise for switchers and offer no incentive to switchers. According to the questionnaire submitted to the Oireachtas Finance Committee, switchers represented less than 1% of all mortgages drawn down with AIB in the year to 31 March 2015. On that basis, I think it's fair to describe AIB as not being active in the switcher market!

 

[gnf_ireland]

The suggested premium saving was based on what gnf reported on another thread but I have separately made some enquiries and the home insurance offered by KBC certainly seems competitive to me

I have my house insurance with FBD before this and shop around each year for it. Before the 50%, KBC were competitive enough to be realistically considered as an option. If you want me to get the exact figures I can look for you

 

[Sarenco]

OK, I will see if I can explain this a bit better.

Let's say that the only choice I have is between a rate of 4.5% fixed for 20 years or 3.69% fixed for 20 years. Then your calculation would be less wrong. I would have a saving of 19,765.23 ( They are not all the same thing as a euro today is very different from a euro in 2035 - but leave that aside for the moment.)

But when I change mortgage, it's not a 20 year decision. It's a decision which I should review periodically. Lots of things can happen which change the calculation

• AIB may become more expensive
• BoI may become cheaper
• Another lender may become cheaper again, so I switch to them.
• I may overpay my mortgage, so the savings would be a lot less.
• I may extend the term of my mortgage so the savings may be a lot more

Let me give you an example to illustrate why looking at the savings over 20 years is wrong.

Let's say that the cost of moving is €2,000 and there are no incentives from the lender.
Let's say that the mortgage is €100,000 with 30 years left.
Let's say that I am paying 5.1%, the repayments over the life of the mortgage will be €195,461
but I can switch lender and get a rate of 5%, and the repayments will be
only €193,255
The saving, according to your calculation, is €2,206 which is more than €2,000 so I should switch.

I would argue that the annual saving in interest this year will be €100, so it would not be worth paying €2,000 up front for such a paltry saving.

I really don't see why you are insisting that my calculation is "less wrong". I'm simply saying that a reduction in a particular interest rate on a stated loan amount over a particular term will result in a certain interest rate saving. Surely that's just a mathematical calculation.

If both rates are fixed for the term then I really can't see that there is anything else to discuss.

If the rates are floating then you will come out ahead if the aggregate costs of switching (repeatedly if necessary) exceed the aggregate interest saved over the term of the loan. Again I wouldn't have thought there was anything controversial about this statement.

 

[Sarenco]

I have my house insurance with FBD before this and shop around each year for it. Before the 50%, KBC were competitive enough to be realistically considered as an option. If you want me to get the exact figures I can look for you

I think everybody's position would be different but I got an online quote from KBC and it would have resulted in a saving (well) in excess of €250 in our case. I also checked the latest annual home insurance survey carried out by the Competition and Consumer Protection Commission (to make sure we weren't paying premiums that are completely out of line with the market).

 

[Brendan Burgess]

I really don't see why you are insisting that my calculation is "less wrong". I'm simply saying that a reduction in a particular interest rate on a stated loan amount over a particular term will result in a certain interest rate saving. Surely that's just a mathematical calculation.

I am just trying to be nice.

You are adding up 2015 euros , 2016 euros, .....2023 euros, 2024 euros and you are getting €19,765

It's like adding 10 apples, 20 pears, 3 cars, 2 donkeys and getting 35 things, and assuming that they are all equal.

It's wrong to do it, but it's not as wrong as your original post where you assumed that the saving would last for exactly 20 years as planned.

Brendan

 

[Sarenco]

Sorry Brendan, I assumed no such thing. Please re-read exactly what I said and tell me where I said anything of the sort. I was absolutely clear in what I said and the fact that you insist on reading something else into what I said is, frankly, rather frustrating.

Your future value of money argument is also largely irrelevant. Firstly, the greater amount of the savings from a lower interest rate will accrue in the early years of the outstanding term of an amortising loan and will gradually taper off over the term of the loan as the capital amount is repaid. Secondly, the cost of credit would be reduced by over 19% over the term by reducing the interest rate in the example by 0.81% - that's a significant saving regardless of any other factors including the compounding impact of inflation over time.

Again, in case there is any remaining misunderstanding, I am not and have never suggested that the interest rate spread between two variable rates is likely to remain consistent throughout the term of any long term loan. What I am saying is that significant savings can be made by switching mortgage providers on a regular basis, provided the aggregate cost of switching is less than the aggregate interest saved.

Surely that is not controversial?

 

[Brendan Burgess]

Please re-read exactly what I said and tell me where I said anything of the sort.

Secondly, the cost of credit would be reduced by over 19% over the term

There you go. You are saying it again. The cost of credit adds up 2015 euros to 2016 euros etc.

You are ignoring the time value of money when you use the cost of credit argument.

 

[Brendan Burgess]

What I am saying is that significant savings can be made by switching mortgage providers on a regular basis,

Agreed fully. But you must evaluate each one separately. And the way to do that is to look at the savings from today's switch and how long it will take to pay for itself.

Brendan

 

[Sarenco]

There you go. You are saying it again. The cost of credit adds up 2015 euros to 2016 euros etc.

You are ignoring the time value of money when you use the cost of credit argument.

Yes, I am ignoring the time value of money when stating the aggregate saving resulting from a reduction in the cost of credit. Yes, the real value of the savings will diminish over time (as will the real value of the outstanding principal amount) due to the compounding impact of inflation. There is nothing inconsistent between the two statements.

 

[Sarenco]

Switching legal fee contributions:
BOI - 1% of mortgage value
UB - 1.5K
KBC - 1K + 50% off KBC home insurance
PTSB - 1K
AIB - 0

Thanks to shweeney for compiling this and to Sarenco for updating it.

BOI is advertising this morning that its new 3 year fixed rate mortgage, at a rate of 3.6%, comes with an unlimited 2% cash back offer for first time buyers and switchers. Interesting offer, particularly for larger mortgages.

 

[Sarenco]

Agreed fully. But you must evaluate each one separately. And the way to do that is to look at the savings from today's switch and how long it will take to pay for itself.

Brendan

I certainly agree that the period of time that it takes to recoup the net costs of switching from any interest saved is an important consideration in evaluating any switching decision.

However, I wouldn't have thought that it was the only consideration. For example, Ulster Bank offer a more generous package than KBC in terms of meeting switching costs but KBC's rates are better than UB's at low LTVs so the long term savings with KBC should be greater (all things being equal). BOI now offer a healthy 2% cash back on switching but I'm pretty sure you wouldn't recommend their 3-year fixed rate offer at 3.6%.