Alison Fearon from Switcheroo.ie mortgages discusses latest trends in the mortgage market
Cashback offers on mortgages in Ireland can be incredibly tempting, but are they truly beneficial or just a potential trap for unsuspecting customers? While these incentives can indeed save you money, it's important to do a thorough analysis to determine their true value. Considering the headline rate or the cashback offer in isolation is not sufficient when evaluating the cost of a mortgage.
Let's examine an example from a current lender. They provide a 2% cashback on the mortgage amount and an additional 2% on monthly payments. For a customer with a €250,000 mortgage and a property valued at €300,000 (LTV of 83%), their 3-year fixed rate stands at 4.40%. With a monthly payment of approximately €1,375 over 25 years, the total cost over the 3-year fixed period would amount to €49,515. However, the cashback offer provides 2% cashback on drawdown and each monthly instalment, totalling €5,990. Consequently, the net cost to the customer over the 3-year fixed period becomes €43,525 which is equivalent to a rate of 3.57% over the 3-year period. However, after that 3-year period, this effective rate will rise so it is important a customer re-evaluates their position then.
When evaluating cashback offers, it is vital to assess the overall cashflow over the mortgage period. Consider the following factors during your analysis:
- Type of Cashback Offer: Cashback offers can be absolute cash amounts on drawdown, a percentage of the drawn-down mortgage, a percentage of monthly payments, or a combination of these.
- Interest Rate with the Offer: Typically, mortgages with cashback offers may not have the lowest headline rates in the market. However, the cashback amount received should be factored into the overall cashflow analysis.
- Fixed Rate Duration: Determine how long you intend to fix your mortgage rate. The lock-in period affects the overall cashflow calculation.
- Intent to Switch: If you plan to switch at the end of the fixed-rate term, it provides a defined timeframe to analyse cashflows. However, if you don't switch and revert to a higher follow-on rate (Standard Variable Rate), you may end up repaying the cashback amount and the mortgage at a higher rate, incurring more costs over the full term.
While the analysis may appear complex, it's crucial not to make a blanket yes/no decision about cashback offers or other mortgage products without conducting proper analysis. At Switcheroo.ie, we run a full cash flow analysis of all products across all banks. Our platform can quickly provide you with your new cashflow position, whether with or without cashback, fixed or variable rates, for any desired time period up to the end of your chosen term.
If you are considering this or any other mortgage product, be sure to get professional advice and register at Switcheroo.ie
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