Living costs are rising so people are looking for ways to save money. An obvious one is to get a better deal on your mortgage.

Mortgage broker said the mortgage switching market is “exploding”, after a 39 per cent increase in switching between March 2022 and March 2021.

Living costs are a part of it, but there’s more going on in the mortgage market. KBC and Ulster Bank have left. And new non-bank lenders like Avant have joined the market. And having been subdued for twenty years, interest rates and inflation are starting to move.

What’s going to happen with interest rates and inflation? As ever, the market forecast is the best guess we have. In the euro area, yield curves are getting steeper. This means the market is expecting interest rates to go up. Interest rates are expected to rise because inflation is rising, and the ECB is going to need to tamp it back down. 

What about inflation? In The Currency yesterday, former Central Bank governor Patrick Honohan pointed out that the market forecast is for inflation to moderate in the years to 2026. In other words, 2022 might be bad inflation-wise, but you shouldn’t panic. The market forecast is saying interest rate rises will be effective. 

So given all that, for the lucky Irish people who have a mortgage and the associated home, now’s a good time to make sure the mortgage is right.

An admin-heavy way to make some money

Do you have a mortgage? Are you good at admin? Good. What follows is nothing to do with investing, but is a practical money-related tip. Non mortgage holders might want to skip this one.

Go on and take a look at the offers that include a cashback component. Most banks have at least one offer that includes two per cent cashback on drawdown. 

Offers with upfront cashback always come with a higher interest rate than offers without. But, if you do the sums over the period of the fix, the cashback offers usually work out a good bit cheaper. 

(This is the calculation: the monthly mortgage payment times the period of the fix in months, minus the cashback plus legal fees of €1,200 or so.)

As well as the total two-year cost of the mortgage being cheaper, you get the benefit of the cash upfront in a lump sum. As opposed to a lower mortgage payment over the course of three years, which is much less fun.

With a cashback offer, the way it works is the bank will offer a percentage of the amount you borrowed, in cash, when you draw down the mortgage. They’re only offered to new customers. So if you want to get your hands on that cashback, you’ve got to switch banks. This is a pain. It involves many emails and much paperwork. You will have to engage a solicitor. It can take two or three months. 

But at the end of it, you’ll be looking at a nice lump of cash. For a €350,000 mortgage, it could amount to €5,000-6,000 upfront, after legal fees. Over the course of a three-year fix, including mortgage payments, this still comes out about €3,000-€4,000 cheaper than the best non-cash back offers. And the bigger the mortgage the more you’d make, since solicitors’ fees are a fixed cost. 

What’s the catch? One catch is that the admin involved is a genuine headache. Maybe you could make more money doing something else. Another catch is that unexpected problems with the title, engineer’s reports and so on can add time and cost to the deal. Another catch is, if you’re switching and don’t get your timing right, you can end up on the expensive variable rate with your existing provider while you wait for the deal to close.

How is this possible? My guess is that banks know people rarely switch mortgage provider, because switching mortgage provider is such a faff. So they’re happy to pay a couple of grand upfront to acquire a customer. They amortise the cost of the cashback over five or six years. But if you jump at the earliest possible point, at two or three years, you get to keep the difference.

Nothing is stopping you from fixing your mortgage for two years, taking the cashback, and then jumping onto the next cashback and fix in two years. And so on. 

In four years, after three switches, you could have netted 2-5 per cent of the value of your mortgage in cash, depending on how big it is. That’s after solicitors’ fees and increased interest bills. 

Eventually, once you’ve completed a round of the carousel, and switched between all the banks, someone may twig what you’re up to and refuse to give you another cashback. But that’s ok. You’ll have lost nothing. At that point you can just take a normal boring mortgage.