What you need to know:
There are now more than a dozen financial institutions offering mortgages in Ireland. This, of course, means that there is increased competition for your custom, so shopping around will certainly pay dividends. You can obtain a mortgage from a number of sources including banks, building societies and mortgage brokers. Banks and building societies tend to sell their own mortgages, whilst brokers sell mortgages for commission on behalf of any number of lending organisations.
However, this increasing number of lenders offers an ever-growing range of home loan options. It can seem quite daunting at first trying to understand the financial jargon as you seek out the product which best suits your circumstances and preferences. Here we try to offer some basic advice when selecting a mortgage product, but you should always consult with the lenders directly before making a decision about a new mortgage. After all, it may become the single-most expensive purchase you ever make.
A mortgage means a loan secured against property. When you take out a mortgage with a lender, you enter into an agreement via a formal contract to give the lender a first charge over your property. This means that the lender must be paid back first if the property is sold. Repayments of the loan are made monthly, but if you regularly fail to make the repayments, then the lender can apply to the courts to take possession of the property in order to recover the outstanding loan amount.
This is the most straightforward form of mortgage with capital and interest paid off monthly from day one, just like a personal loan except over a longer term. In the early years, you repay mostly interest on the loan, but over time the ratio changes with the proportion of capital repayment increasing and interest reducing until the loan is paid off. You also need to take out a life insurance policy for a relatively small monthly fee to protect the lender’s capital in case of your death or loss of earnings during the loan period.
The monthly repayments to the lender only cover the interest on the amount you have borrowed. You must also invest in an endowment policy with a Life Assurance Company to which you make separate monthly payments. In theory, at the end of the term of the mortgage the proceeds of the life assurance policy should be sufficient to clear the initial amounts borrowed, and even provide a savings nest egg. However, the endowment policy’s performance will be linked to how wisely the Life Assurance Company invests your money in various sections of the Stock Market. There is no guarantee that an endowment policy will clear the principal amount owing at the end of the term of the loan, so you may have to make a final payment from other savings. You are strongly advised to monitor the performance of the endowment at regular intervals, and the Life Assurance Company will write to you regularly on this subject..
This type of mortgage may suit individuals who are self-employed or have insufficient pension funds. You make monthly repayments of the interest portion on the loan to the lender directly. Additionally, you make contributions to a personal pension scheme, which qualify for tax-relief. At retirement age, you receive a tax-free lump sum plus taxed regular pension income. Most, if not all, of the lump sum is used to clear your mortgage loan at your retirement date. As with an endowment mortgage, the value of the final lump sum is subject to Stock Market investment fluctuations over a long period of time. There is no guarantee that the lump sum will match the mortgage capital owed and you could be left with a shortfall unless you monitor your pension scheme’s progress.
This is the simplest and commonest form of loan. The interest rate is set according to the lender’s standard variable rate. With a variable interest rate mortgage your interest payments can rise or fall depending on the lender’s overall business performance in ever-changing financial markets. Ask for a Tracker variable rate if you want to restrict repayment variations linked only to changes in the European Central Bank base rate, which can go up as well as down.
Loans of this type fix your monthly interest payments at a specified level for an agreed period of time such as 1, 3, 5 or 10 years. This could help you better plan your finances in the early years of a mortgage, but there may be penalties in the longer term, such as no flexibility to increase repayments to pay off the loan quicker and reduce your overall outlay. When the fixed-rate period has ended, your monthly payments change to match your mortgage provider’s standard variable rate
A capped rate loan has a fixed ceiling on the interest rate for a period of time, above which your mortgage rate will not go. If the Bank base rate falls, you can still take advantage of interest rate decreases, however, in return for more certainty on repayment levels, you risk paying more than the lender’s standard or basic fixed rates.
This type of loan helps reduce your expenses in the early years of the mortgage by setting your interest rate a little lower than the lender’s standard variable rate. Your interest payments may still fluctuate, but the differential between the discounted rate and the standard variable rate remains constant. This arrangement is helpful to first-time buyers who need to retain some income early on to buy furniture and such like. There will inevitably be penalties of inflexibility in the longer term.
Another arrangement to assist first-time buyers or those awaiting imminent release of capital from elsewhere. You make no repayments at all during the first 1 - 3 months of your mortgage but the payments that you miss are spread over the remaining term of your mortgage. This option may preclude you from enjoying the benefits of fixed or discounted rates.
Some lenders offer options to pay some of your mortgage interest at a fixed rate and some at a variable rate which minimises the impact of Bank base rate changes. Some products give you great flexibility in shortening the term of the loan provided that you agree to pay a minimum monthly repayment set slightly higher than the standard rate
A.P.R. stands for Annual Percentage Rate. The APR is designed to help you shop for loans by making them more comparable. This rate takes into account an allowance for any additional financial fees involved in setting up and administering the mortgage, so it always tends to be higher than the basic interest rate.