21st August 2017
Hey all, in this blog we will aim to share insights on the very best mortgage that you can get, whether you are aiming for your first mortgage or have a collection of them we hope to share ideas which will save you a small fortune over your life-time.
All we ask in return is to help us spread the word, share the article with the little icons at the bottom, check out the podcast, and in general just be a huge fan of our little site! Be delighted if you checked out our why.
We shared insights a number of months ago in what still remains one of our most popular blogs in the area of over-paying one’s mortgage and the impact that has on the number of years you will be lumbered with it and also the lump of interest you would have paid.
Speaking of which, if I was to offer you €38,000 of a saving over the next 20 years, and all you had to do to earn it was about 8 hours of work, and an initial outlay of €1,000 to €1,500 for solicitor fees……what would you do? Many of us might fall into the most irrational behavioural finance phenomenon and not be able to see past the cost of €1,500, but on the face of it there surely is no doubt that we know it makes financial sense, right??
Current Mortgage Market:
According to the Central Statistics Office there were 120,000 mortgages approved in 2005 here in Ireland. In 2015 there were 33,000! While there is no doubt we have started to see an increase in mortgages and people moving homes in the past 2 years, we are still (and surely set to continue to be) a long way off the levels of 12 years ago (12 years ago imagine!).
If you are in the market for a mortgage, or you already have one here are the 2 most common questions asked!
Question 1: What is the best mortgage available today?
Answer: The one with the lowest rate. That is the simplest answer, the only correct answer.
Question 2: Does the rate make that much of a difference?
Answer: It makes all the difference!
What Impact Does Interest Rate Have On My Mortgage?
Now the rubber hits the road folks! Lets assume you have a mortgage of €210,000 and your house is worth €280,000. As they say in the industry with a smug look on their face ‘you have an LTV of 75% there yaa’! Meaning your loan which is equal to 75% of the value of your home.
If your mortgage rate is 4.5% and there are 20 years left on the mortgage you will pay €106,000 in interest over the course of those 20 years (plus the 210k obviously!). They wont tell you but the Cost Of Credit (the interest you’ll pay assuming rate stays as is) will be €106,000!
If your mortgage rate is 3% and there are 20 years left on the mortgage you will pay €68,000 in interest over the course of the 20 years (plus the 210k onviously!).
A 1.5% difference of rate over that period of time saves you €38,000.
I Have My Mortgage A Long Time Now, Worth Looking At Options?
Maybe you should and maybe you shouldn’t, depends on what you stand to benefit.
Let’s now assume you have a mortgage of €140,000 and the house is worth €300,000. in this instance your Loan To Value is lower, it’s at 47%. If your rate is 4% and there are 20 years left you are probably paying the region of €850 per month. Your Cost Of Credit will be €62,000 over the next 20 years folks.
However if your mortgage rate is 3%, and again there are 20 years left you are probably paying in the region of €770 per month. Your Cost Of Credit at 3% will be €45,000 approx.
That’s a saving of €17,000…….surely worth an investment of time and a little effort!!?
Speaking of these savings, it is an absolute waste of time and effort and indeed your good intent if you go about securing a lower rate but then do not make full use of the savings. Think about it, if you get a reduced rate, and therefore have more disposable income then that monthly amount saved will just get spent on ‘stuff’ and you will stand to make no long term benefit from it. So our advice would be to make a plan for that savings, whether that is to begin or boost a kid’s or grandkid’s savings account, to pay for an extra holiday for yourself or some other experience, or whatever is your financial priority. But please please make sure to do that, otherwise it will be spent on ‘stuff’ and instead of going to the bank it will go to shops or pubs or wherever you spend your discretionary income!
What About The 2% & 3% Cash-Back Offers??
Lets say you are going to borrow €200k, you are shopping around for the best mortgage deal. You are attracted to the 3% Cashback offer, so decide to go with that. You will get €6,000 once the mortgage draw-down, which you intent to use to buy a really nice TV, a comfy sofa and a leave a few quid spare to use for ‘whatever’ (ultimately disappears on ‘stuff’!).
One of the deals at the moment offers that 3% Cashback but the rate is a full 1% more than you could get elsewhere, which doesn’t offer the Cashback offer. However that 1% more of a rate will cost you €31,000 over a 25 year mortgage……..so the ball is in your court; take €6,000 right now or take €31,000 over the next 25 years! Unless you are desperately stuck for the €6,000 (in which case should you really be buying a house) you’d surely have rocks in your head to go for that option…..!?
So What Is The Best Mortgage Available?
We have gone a long way about answering this question but the evidence and all human logic would point to the fact that the best mortgage is the one with the lowest rate. The Cashback offers work, that’s why they do them, but as always begin with the end in mind, look at what you are doing, think it through and help yourself make an informed decision about this long term commitment.
Whether you have a new mortgage, have one a long time and are making in-roads on it, or are shopping around for your first one……check the rate, see what else is available and find out how much you could stand to benefit by getting yourself a better rate.
A 1% difference in rate will result in approximate savings of €12,000 per €100,000 of borrowing over a 20 year term.
As always thanks so much for reading and checking out Informed Decisions. Please do share the love!
QFA | RPA | APA | Qualified Coach
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