Mortgage rate drivers

Before I get into the pros and cons, a bit of background on how mortgage rates are set.

Fixed

On average, fixed mortgage rates follow the same trend as the government bond yield market.

Bond yields are driven by economic factors such as unemployment, export and inflation.

Looking at a 5 year fixed rate mortgage vs a 5 year government bond yield the trends are very closely linked, with the mortgage rates being between 1 and 2 percentage points higher than the bond yields.

For example: In 2006, the 5 year bond yield rate was 4.18% and an average 5 year fixed mortgage was 5.25%. In 2019 the 5 year bond yield was 1.29% and the 5 year fixed mortgage rate was 2.54%.

Variable

Mortgage rates linked to the Bank of Canada’s prime rate.

Variable mortgage rates are driven by the same factors as bond yields, except variable rates fluctuate with movements in the prime lending rate. This is the rate at which banks lend to their most credit-worthy customers. Variable mortgage rates are typically stated as prime plus/minus a percentage discount/premium.

Worth noting here though is that the Bank of Canada’s prime rate and the prime rate of major financial institutions are NOT the same rate. Also, financial institutions are not obliged to pass on cuts to customers. For example: The Bank of Canada cuts rates by 0.25%, your bank may chose to only pass on 0.15% of that cut.

There is a really great article on this with some charts here.

Fixed mortgage

Now onto the pros and cons of each.

Pros

• Fixed interest payments
  • These mortgages give you a set mortgage repayment in terms of how much interest you will pay for the term you sign up for. If the Bank of Canada’s prime rate has a significant increase, your mortgage interest will be unaffected until you are due for renewal.
  • This gives young buyers a sense of security when budgeting can be tight and you don’t have much wiggle room to make up for unexpected, potentially significant increases. This is an incorrect perceived safety net which I will go into below.

Cons

• Fixed interest payments
  • At the same time, if the Bank of Canada’s and your bank’s prime rate has a significant decrease, this savings will not be passed onto you and you could end up paying much more in interest for a number of years than you would if you had a variable mortgage.
  • Worth noting is that historically, variable rates have proven to be less expensive over time
• Fewer pre payment/lump sum options
  • Most bank’s offer at least some form of pre-payment or lump sum options before applying penalties. Our bank for example allowed you to pay off 15% of the initial mortgage amount per year before penalties would be applied. If you get a raise, a bonus or an inheritance and decide you want to start paying down your mortgage more quickly, a fixed rate mortgage will not allow for much flexibility, though 15% of 200,000$ is 30,000$ so these amounts are usually sufficient for most mortgage holders.
• Larger penalties for pre paying/switching before your term is up
  • If you decide to sell or in a worst case scenario, need to sell before your term is up you could be looking at very large penalties with a fixed rate mortgage.
  • Typically the bank will charge the greater of 3 months interest OR the interest rate differential. I’ll explain the impact of this a little further below.

Despite all of the cons, 66% of Canadian mortgages are fixed terms. This seems to indicate to me, that a large portion of Canadians are:

• not financially secure enough to accept a potential increase in mortgage payments even though it may save them more over the long run
• not aware of the flexible nature of variable mortgages which I will explain below

This seems to align with my notion on a slightly separate note, that people who have more money or are better at saving can get things cheaper where lower earners or bad savers are penalized.

For example: if you pay your insurance premium on a monthly basis, insurers will often charge a premium or admin charge to accommodate this. This can end up costing people who don’t have enough for a lump sum once a year 3-5% more for a lot of services. This can really add up over time.

This same concept seems to apply to fixed vs variable mortgages where the more money you have, the more risk you can take, the better savings in interest rates you can achieve.

Variable mortgage

Pros

• Potential price fluctuations
  • as mentioned above, historically, variable rates have proven to be less expensive over time. If you sign up to a fixed rate mortgage and a month later the Bank of Canada’s prime rate drops, you will be stuck paying more in interest than you would on a variable mortgage.
• More flexible pre payment/lump sum options
  • From what I can tell, variable rate mortgages have the same pre payment limitations as a fixed rate mortgage with the exception that the penalties for making a payment over the agreed amount are MUCH less – see below
• Lower penalties for pre paying/switching before your term is up
  • From what I can tell, variable rate mortgages only charge 3 months interest for an early termination. The interest rate differential doesn’t apply for variable rate mortgages. This can provide massive savings if you need to sell before your term is up.

Cons

• Potential price fluctuations
  • The biggest perceived risk of variable rate mortgages is that your monthly mortgage payment can change should markets shift. This is incorrect! With a variable rate mortgage your monthly mortgage payments will NOT change. It is the percentage of that payment which is paid off the principal that will change.

Pre-payment charges explained

Ok so we now know that if you break a fixed rate mortgage early you pay:

The greater of:

• 3 months interest OR
• an interest differential*

With a variable rate mortgage you pay:

• 3 month interest regardless of what is left on your term

What does this actually mean?

Let’s look at a scenario:

• 5 year mortgage at 3.29%
• Posted fixed mortgage rate on date of contract signing was 3.5% (you got a discount)
• 3 years in you need to sell (2 years remaining)
• Current posted market rate for 2 year fixed term is 2.5%
• Mortgage remaining: 200,000$

Fixed rate mortgage:

*An interest rate differential actually has nothing to do with the interest rate you are currently paying. The bank will take the posted rate for the term you agreed to on the day you signed your contract and take the difference of today’s posted rate for the remainder of your term. Clear as mud!

Annoyingly making something overly complex unnecessarily to keep customers in the dark about what they will actually pay.

So here’s how that works.

Interest rate differential calculation:

Posted rate at mortgage signing minus posted rate for remaining term divided by 12 to covert to monthly rate = interest rate differential factor

then

interest rate differential factor multiplied by remaining mortgage value multiplied by remaining mortgage term = early payment penalty

3.5% (0.035 – posted rate at mortgage signing)

– 2.5% (0.025 posted rate for remaining term)

/12 (to convert to monthly rate)

= 0.00083 interest rate differential factor

0.00083 * 200,000$ (remaining mortgage value) * 24 months (remaining term) = 4,000$

I’m not sure how it works if the current rate is higher than when you signed the contract. I’m assuming then that there is a negative amount in the calculation and then the 3 months interest will be the greater amount.

I’m also not sure if you have 1.5 years left, do they take a one year or a two year term for the current rate in the calculation but assuming they would take the 2 year.

The bank may also have a discharge fee which can vary from province to province, anywhere from an additional 70$ – 270$.

Variable rate mortgage

Existing mortgage rate * remaining mortgage value * 3/12 (3 months) = early penalty fee

3.29% (0.0329) * 200,000$ * 3/12 (0.25) = 1,645$ + any discharge fees (70$-270$).

Calculator

If you need it, there is calculator here that helps with this calculation but its also useful to understand the math behind it so you can sense check your figures.

My mistakes

As you many know, we have a property in Canada.

I am only JUST discovering the benefits of a variable rate mortgage. This makes me so mad! That this is BASIC financial literacy which banks should be informing you about when signing up for mortgages.

I would have considered myself fairly well researched, even at 26, when I signed my first mortgage but am only finding out about this 8 years, and 2 mortgages later!

My understanding of fixed vs variable was that variable meant that your monthly repayments could fluctuate. I wasn’t conformable with having no control over such a big expense and went for fixed. We also weren’t aware of the pre-payment differences.

When we first signed our mortgage, we bought a 1 bedroom condo downtown. Being from the country, I wasn’t sure if I was going to like living there and wasn’t willing to sign a term longer than 1 year as I wanted flexibility to sell if we needed to.

Every year thereafter, there was some question on whether we would stay there. In the second year, we LOVED living there but weren’t sure if we wanted to start a family in the next few years and would need at least one more bedroom.

Year 3 we decided to move back to Ireland and were waiting year to year to see if the market would recover enough to sell.

So we were only ever looking at the 1 year fixed options as even though I was aware that historically variable rates performed better than fixed, the shortest variable term was 3 years and I wasn’t aware that the pre-payment terms were the LEAST of what you would pay in a fixed term.

Selling soon?

Recently, I got an early mortgage renewal prompt from our bank and I was trying to figure out which options would cost us less as we were planning on selling in the next year.

The options I was looking at was

• a 6 month open term at 6.75%
• a 1 year fixed term at 3.44%
• a 2 year fixed term at 2.65%

I wasn’t even considering a variable as again it was a minimum of 3 years, though now there is a 5 year at 2.25% (prime – 0.20%)

The 6.75% option would cost us 1,000$/month in interest for every month we don’t sell but no early termination fees

The 3.44% option would cost us 510$/month in interest for every month we don’t sell but also cost us 1,530$ in early termination + 270$ discharge

The 2.65% option would cost us 393$/month in interest for every month we don’t sell but also cost us at least 1,179$ in early termination + 270$ discharge fee. It is impossible for us to known what the interest differential would be as we don’t know what the rate will be by the time we are ready to sell. In the current market I would expect the rates to go down and so there could be a differential to pay.

The lowest it’s ever been since 1935 has been 2.25% so that would be 1,424$ which is higher than the 3 months and the amount I would need to pay.

Now that I know about the variable option I think I will renew at a 5 year variable at 2.25%

This will cost us 334$/month in interest and 1,000$ in early termination fees + 270$ discharge fee.

So if I sell in month 1 after signing the renewal the 6 month open term wins but only by 333$. Every month thereafter the 5 year variable option wins out.

As I could have renewed early back in February, I could have been spending 154$/month less in interest since then had I known about this. Not to mention how much more I paid in interest over the last 8 years as I thought my only options were 1 year fixed rates for our given circumstances. I don’t have the stomach to do the math but even a fraction of a percentage difference over that term could have cost me thousands.

Here is how the 4 options pan out over 6 months. For example; If I took the 6 month open term and sold in month 1 after renewal I would be out 1,000$ in interest. If I sold in month 2, I’d be out 2,000$ in interest. If I took the 1 year fixed and sold in month 1, I would be out 2,040$ with interest and pre-payment charges and so on.

Don’t trust bankers

My overall feeling from all of my dealings with bankers over the years is, that they either know less than you do OR are trying to get you to pay the most in interest to them for as long as possible. This should come as no surprise really but I think young people that are in a position to buy a house may not have realized this yet.

In my latest dealing with the bank, I explained my situation and asked for guidance on which option would cost me less over all as we were looking to sell in the next year. I asked for the exact calculations so that I could do the analysis myself. They could not answer the question. They had a calculator which told them what it would cost if I sold today but couldn’t give me any more details. When I gave a specific example say: “If we go with a 2 year fixed but pay it off only 6 months in what is the penalty vs if we get a 1 year fixed and pay it off 6 months in”. The banker said with certainty, and I quote “If there is less term remaining, there will be less penalty! So in your example, 1 year fixed will save you more.” This is only partially true and with the rate differential there is no way they could actually tell me what my early penalties would be. Also to state with certainty like that with no caveats or further explanation is so dangerous. If I was the type of person to take their word for it, which a lot of people would be, they would end up costing me almost 1,000$ extra. When I compared the exact scenario I provided, once I understood the calculations, the difference between the 1 year and 2 year fixed after 6 months was 800$ more for the 1 year fixed option. They also did not opt to tell me about the variable mortgage rate which would almost certainly win out in all scenarios, and in the scenario I gave would have cost me 1,600$ MORE to go with the 1 year fixed option.

My previous dealings with another banker were even worse. They tried to get us to sign up to a 5% mortgage when there was one posted publicly on their site for 2.64%. They tried to get us to sign an open form which would allow them to change the terms of our mortgage to avoid us coming into the bank (kind of like signing a blank cheque really). There were a few other things she tried to get us to sign up for which I can’t recall but when we refused all of them, she started to get annoyed with us. Basically we weren’t going to give her an easy commission on whatever it was she was selling. She also tried to convince us that paying 40$ extra a year off our mortgage would make a big difference saying “every little helps”. While there is some truth in this, there were far more helpful tidbits she could have imparted on us if she was really trying to help. Like the difference between variable and fixed mortgage rates for instance.

With 66% of Canadians on fixed mortgage rates I really think we’re all being taken advantage of!

Unless I’ve misunderstood something, and if so please do let me know, but for now I’m sticking to my guns that bankers are not there to help you. They are there to sell products for the banks.

Bonus content

Collateral mortgage

Another thing to be aware of is a collateral mortgage which makes it more expensive for you to switch mortgage providers. Yet another way for banks to make it harder for you to get a better rate elsewhere.

When we first started out there was an offering called a “Total Equity Plan” which allowed us to split our mortgage into various products. For example 30% could be a 5 year fixed, 30% could be a 5 year variable and 40% could be a 1 year fixed. You also had the ability to take out a Home Equity line of Credit if you ever wanted to access some of the equity you had built up in your home.

At the time this sounded like a really cool way to hedge your bets against different interest rate models and allow us to access equity easily should we need to.

In reality, we only ever went with 100% on the lowest rate we could get as that was what was most important to us rather than spreading risk.

What they didn’t tell us was that this type of mortgage needs to be “dismantled” as such by a lawyer so when you go to switch mortgage providers (should you ever find a better rate elsewhere), you will need to have a lawyer process it which makes the cost of switching almost pointless.

Anyway, I’ll leave it there now that I’m all riled up I need some time to calm down before bed.

I hope this post goes far and wide to help people see the big picture math behind their options when it comes to mortgages.

And if I’m wrong somewhere please do let me know! I love to give people the benefit of the doubt but time and time again I have been proven otherwise when it comes to banks unfortunately.

Some, but not all, of the below tools include affiliate links where I will get a small commission if you sign up. I only include tools I use and love so if you sign up, it will be a great support for me and the content on this blog.

Investing

Degiro – The online trading platform I use for non-pension self-directed investing (ie: my ETF portfolio). As usual do not invest money you can’t live without. Investing involves risk of loss.

Banking

Bonkers.ie – Depending on your banking habits (minimum through-put, minimum balance, number of contactless payments, number of ATM withdrawals etc), different bank accounts may suit you better. This comparison tool is handy to figure out which works out best for you.

Revolut – This is an online bank account. They are great for avoiding non-euro transaction fees (which I use for Amazon and other UK purchases) and other online purchases.

I considered using it as my main account but ruled against it for a few reasons. The biggest consideration is that I don’t think they are regulated in the same way as brick and mortar banks so if the company goes bankrupt, any money you have in the account is not protected. Smaller consideration is that there is no facility to lodge cheques (we still get the odd one, like from older relatives for wedding and baby gifts). I suppose you could use a friends bank to lodge them and have them transfer but the deposit protection thing is still an issue.

Utilities

Electricity/Gas/Broadband/Mobile/Insurance

Bonkers.ie – I use this tool to compare gas and electricity every year. It’s best if you look up your annual usage to put into the tool, an easy way to do this is to look at the “actual” readings on your first bill of the year and then look at the final bill of the year that has “actual” readings (rather than estimates). I have found the online reporting tools by various providers aren’t accurate and then retention teams quote off different figures to try and convince you into staying. I have a spreadsheet which includes standing order charges and VAT rates etc so that I can compare the full picture when being quoted various deals from retention.

This site also includes Insurance comparisons (Life, mortgage protection, serious illness and health), and broadband comparisons.

Switcher.ie – This is similar to bonkers.ie but doesn’t cover insurance or banking comparisons but does cover mobile, broadband (inc TV), and gas/electricity.

Mobile phone

We buy our phones outright and try to make them last as long as possible. This allows us to have SIM only packages. I currently use An Post (they use Vodafone’s network so I have found the coverage quite good) and pay 20€/month for 7GB and 250 minutes and texts. My husband uses Eir as he gets access to the Eir sports package on his phone (since we don’t have cable) and 30GB of data and unlimited calls and texts for 30€. These are 30 day contracts or pay as you go type deals.

There is a new company called GOMO (owned by Eir) who also offer unlimited calls, texts and data for 13€/month. 30 day rolling contract and port your number. Mixed reviews of customer service so holding off on switching to this for a bit.

TV

Netflix

Internet

We’ve been with Vodafone for a good few years as we always seem to get good deals with them. Though you need to call and ask. We upgraded to fibre this year and now pay an average of 37.5€ for 12 months. 30€ for 6 months, then 45€ thereafter.

Library

The library is an amazing resource that so often gets forgotten about. No longer just for books. When our son was born I bought a few board books and just assumed the library wouldn’t have any due to the slobbery nature of little ones but they have a great little selection. They also have printing facilities and events for teens, parents like book readings (all pre-lockdown). I also recently discovered that you can gain FREE access to magazines and publications on your phone using your library card. Download the press reader app, select your local library, enter your library card number and create a password. Access a wide range of popular magazines including Forbes, Men’s Health, Style at home, House beautiful, Highlights for kids and many more. If they don’t have a book you’re looking for, you can put in a request and they will order it in for you. They also have some digital content like DVD’s, music, audiobooks etc.

Online Shopping

Honey – A Chrome add-on which automatically searches for discount codes. You save money on purchases you were going to make anyway. You also gain points from certain websites (like booking.com) which you can exchange for vouchers for places like Amazon.

Parcel Motel – A great option for getting products off Amazon that don’t deliver to Ireland. Parcel Motel gives you a UK address and they deliver to a location near you (usually at petrol stations). Just be careful of orders which don’t group items together as you could end up paying for multiple parcel motel stays for 1 Amazon order. I’ve been burned by this before. Even though you select “group items together”, sometimes the items are coming from different warehouses and grouping is not possible. Anyway, parcel motel costs 3.95€/package so a great option if it’s something you really can’t get at home.

Mortgage

CPCC mortgage comparison – A great website for comparing mortgage rates come renewal time. They also have mortgage calculators which I use for a lot of my analysis when considering investment property costs or paying lumps off my mortgage etc.

If you apply the lump sum section it shows you how much your monthly payments will be reduced by, by the lump sum while keeping your mortgage term the same length. If you apply the extra monthly payments it shows you how many years your mortgage will be reduced by and how much less interest you will pay.

Expense Tracking

YNAB – This is the tool I use for expense tracking. It allows you to split expenses so I can easily track expenses between my husband and myself. It also allows multiple budgets for different currencies. The reports are handy too.

I used to use the desktop version which had a once off fee but now they’ve moved to a cloud based paid subscription of 84$/year (~75€). I struggled with this cost but I’ve also struggled to find an alternative that suits my needs. A way to make this easier to swallow is to convert the cost into your hourly wage and see if it will save at least that amount of time per year in maintenance as it has the auto syncing and our historical transactions from the desktop version.

That said, the only Irish bank that supports simpler imports is Ulster Bank. However, their current account fees are exorbitant, so updating does take a bit of file preparation. Apparently, Oath is on the way which is a secure method of auto-syncing with bank accounts so that feature may be coming in the new year.

Some other FIer’s use an app called Pocketsmith which has auto bank sync using the Salt Edge function. However, I haven’t figured out how to track expenses in it where I assign a certain portion to my husband and another portion to myself. You can split expenses but only into different categories and not between people as far as I can see, the reporting visuals were not as intuitive as YNAB so I ruled this one out.

Travel – Accommodation

Air B’n’B – Great site for finding cheaper accommodation. If you don’t already have an account – get 41€ off your first trip!

Booking.com – Another great accommodation site. I usually compare between both Air B’n’B and Booking.com. As mentioned above, if you use the Honey chrome-extension you can earn points which you can convert to Amazon vouchers. So far I’ve earned 40£ just by booking accommodation I would have booked anyway.

Travel – Fights

Google Flights – One of the quickest easiest ways to find flights with easy search filters for max duration, stop overs, price etc. Also really handy to explore destinations by putting in one or two starting airports and seeing where you can get to for little money. Great if you are just getting ideas of where you want to go, or where it’s cheap to get to from your airport. They also have price tracking notifications so you can be notified when prices increase or drop if you have a specific flight/date in mind.

Skyscanner – Similar to Google Flights, easy to search multiple airlines and sometimes has better prices than Google Flights.

Travel – Getting Around

Google Maps – Google Maps is great for showing how to get around a new place. It includes public transport, walking and even Uber prices and times. Street view is also a great way to explore an area before you get there.

Rome2Rio – Sometimes better at the public transport options than Google Maps. It even shows much longer journey price and booking options from country to country.

Ex-pat/Cross-border Tax Advice

ETSI – A great resource for cross border tax advice as well as other personal tax matters.

Income tax calculator

PWC tax calculator – I use this tool ALL the time for my analysis on take home after taxes based on various scenarios. It’s great as it takes into account various credits and pension contributions etc.

Know your criteria

When we were looking for a house I started by compiling a checklist of all the things I wanted. My list may look different to yours but for interest sake here was mine, maybe my list will have some things you had not considered.

The main criteria was that we wanted the overall cost of owning to be less than our current rent which was low at the time at 950€/month for a 2 bedroom apartment. Even with the rental increase caps being brought in, our rent was continually going up. It started at 890€/month, then to 950€ then by the time we left it was 1,052€ and now the very same apartment is renting for 1,400€/month – That’s a 63% increase in housing costs in just 5 years! Needless to say we wanted a bit more control over our expenses as well as a little bit more freedom to have pets and make things the way we wanted them. We also wanted more stability. We have had two sets of close friends as well as plenty others on local forums, who were kicked out of their homes, as landlords were selling or refurbishing and with the market as it is now, they needed to either pay much higher rents to stay in the area they were in or move out of town. Even our friends that moved out of town were being kicked out of the home they moved to as their new landlord had also decided to sell now that markets were more favourable. Being at the mercy of a landlord was a bit scary especially since we were trying to start a family at the time. So regardless of all the other rent vs buy debates, these were the main reasons which swayed our decision to buy.

And now for the remaining criteria:

Non-negotiable:

• lower cost than paying rent
  • as mentioned above, by the time we moved we were paying 1,052€/month for rent and when we bought the costs of owning were coming in at 914€/month including mortgage (after 20% downpayment), life insurance, home insurance, refuse, property tax and increased car insurance due to area. Now when you include the added maintenance and upgrades we’ve done owning has been more expensive but most of those are optional, non-recurring and hopefully adding to our resale value
• house position lets in sunlight
  • the main living area and balcony in our apartment was north facing and it was always dark even on a sunny day, this was a strange one for me as I’d never experienced how the lack of sunlight can impact your mood. My first winter in Ireland was very tough, I would come home from work and cry even though nothing was wrong except for my lack of vitamin D! Any time I would find a house I liked I would check its position on google maps. Our home now gets lots of light in the sitting room and master bedroom in the morning and sun all afternoon in the kitchen, back garden and other bedrooms which is so so nice to come home to after work on a sunny day.
• close enough to one of our works and/or city not to need 2 cars OR the house price would be lower to cover the cost difference
  • we calculated that a 2nd car would cost us 200€ more per month plus another 150€/month for tolls for 2 cars if we lived beyond the toll booths and that’s without a car payment so if we found a house further away the mortgage would need to be 350€ less per month to justify owning a 2nd car. In our case that meant 175,000€ with a 20% downpayment would be the max to buy outside of town
• commute less than 30 minutes for both of us
  • for us, in addition to lowering costs we didn’t want to add more time to our days, after all time is the most important resource, we were renting in the city and so our commutes were small, we didn’t want to buy a house with a lower cost only to add time (and cost as mentioned above) to our commutes so distance from both of our work places was also a big factor. If I found a house I really liked I would google map the commute for both of us (including updating the setting to prime time traffic and public transport to help assess if it was feasible). In Cork for example, even though there are centrally located homes in well serviced suburbs, I know that traffic in those areas can get really congested and so using the google map feature that allows you to select journey time helped to highlight areas that get pretty congested. This helped rule out a lot of homes. I’m lucky enough to have flexible work hours so can go in earlier or later to avoid traffic times but now that we have a kid and will be facing drop off and pick ups we may not have that luxury as much anymore. That said, my husband will be within walking distance of both home and the creche so between the two of us we should be able to work something out with the one car.
• high speed internet available
  • we are a gaming family and a large part of how we keep entertainment costs down is having access to high speed internet to download games and game updates so living out in the country without internet, even if cheaper was not worth it for us
• parking
  • I didn’t want to have to struggle to find a parking spot on the street every day so availability of parking was high enough on the list
• 2 bedroom min but not too big
  • the more square footage the higher the maintenance cost both in money (to heat and service) and time (to clean). We used to live in a 1,700 sq ft home in Canada and it took nearly one full day each weekend to clean and maintain it, we then moved to a 625 sq ft apartment which only took us 2 hours to clean. A study in 2012 showed that while house sizes in the US have nearly tripled from 1950 to 2010, the usage of those homes when tracked using heat mapping was only 40% of the square footage. I try very hard to be minimalist and not buy stuff for the sake of filling rooms which allows us to live in a smaller space
• space for washer and dryer
  • we North Americans love our tumble dryers. Though I line dry as much as possible I still like the option to throw things in the dryer if I need it quickly and to have soft fluffy towels, sheets socks and jeans. We ended up putting in a gas dryer so it was a little more energy efficient than electric.
• energy efficient or able to upgrade cheaply enough to bring up efficiency
  • we managed to find a house with a BER3 rating with gas heating, we have since upgraded our boiler which should bring it to BER2 rating
  • for the non-Irish readers a BER rating is an energy efficiency rating all homes must list with their sale to give buyers an indication of heating costs, it ranges from A1 (<25 kwh/sq. m/year) to G (>450 kwh/sq. m/year)
  • our 2 bedroom apartment was E2 rated and cost us 1,371€ in electricity for the year (electric heating), our 3 bedroom house with much larger square footage cost us 50€ more for the same time frame – I’m a cold creature and keep the house at 20 degrees in the winter so my costs will likely be higher than others

Negotiable:

• south facing private back garden
  • we did find a house with a private garden but it is west facing instead of south, still though it gets a lot of sunlight from early afternoon to sundown which is right when we get home from work so was a happy compromise
• space for bins outside
  • I didn’t want to have to drag refuse bins through the house
• nice area
  • this is one we compromised on, in order to meet all the other criteria, especially the cost one, we ended up buying in a less desirable area
• scope to modernise and increase value
  • I studied interior design in college and so I like to put my stamp on whatever house I’m living in even if it’s just cosmetic. The house we ended up with was in great condition and would have been fine with a lick of paint but we updated a few things to be more our taste. This is somewhat linked to the nice area criteria as even if we pumped loads of money into modernising the house, the area would determine a cap on how much we would get back for those updates once we sell. We knew that once we spent beyond a certain value that those updates were purely for our enjoyment and not adding further value to the sale price so we kept this in mind when choosing finishes in our upgrades ie: laminate counters instead of granite or engineered hardwood instead of solid hardwood etc
• view
  • this was another one we compromised on, we bought in an estate but at least has a large green area in the centre and we are at the top of a hill so as soon as you drive onto the road you get sweeping views of the cork countryside
• not cookie cutter
  • again another one we compromised on, we wanted something that was a bit different (don’t we all) but ended up finding a house that met most of the other criteria so we said that even though the house was almost the same layout as most other new houses we would put our own stamp on it through other means

Keeping these criteria firmly in mind and not letting emotion rule our home search ultimately helped us make our final decision which I am really pleased with.

Think outside the housing box

For us, as the overriding factor was to lower housing costs, given the current housing prices, I considered many housing options which were outside your traditional home. I looked at and crunched numbers on all kinds of options, including:

• Traditional homes in the city
• Traditional homes outside the city
• House boats
• Tiny homes
• Buying a site and building a traditional home
• Buying a site and building a pre-fab home
• Buying a fixer upper and renovating
• Mobile homes

There may have been more but ultimately even after being open to all those options, we still managed to find a traditional home that ticked most of our boxes.

Weighing the costs

If cost is one of your driving factors the you need to look at the big picture not just the mortgage cost. Below is a list of things to consider in terms of the overall cost compared to your current living costs:

• mortgage
• life/mortgage protection insurance
• additional costs for car insurance depending on area (our car insurance went up 120€/year due to the area we moved to)
• home insurance
• property tax
• additional transport costs depending on distance from work/local amenities including:
  • petrol/diesel
  • public transport
  • taxi fares
  • parking
  • tolls
  • cost of a second car if needed including:
    • petrol/diesel
    • motor tax
    • NCT
    • car repairs/servicing/maintenance
    • car payment if not owned outright
• energy costs (as mentioned above – what is the BER rating/cost to heat the square footage you are buying)
• refuse (usually included in rent if you are comparing renting vs buying)
• TV license (I know a lot of people don’t pay this while renting and may be an added cost once you own)
• what furniture do you need to buy (most rentals in Ireland come furnished so unlike Canada where you slowly build up your furniture while renting, people in Ireland typically need to fully furnish a home when they buy with the exception of appliances if not a new build)
• home upgrades (do you want to change floors, paint walls, upgrade appliances etc)
• regular house maintenance including things:
  • chimney sweep
  • boiler service
  • clearing gutters
  • cleaning windows
  • grounds maintenance (grass/tree/hedge cutting)
  • general house cleaning (I know lots of people with kids have opted for paying for house keeping in exchange for more time with their family on the weekends)
• bigger house maintenance:
  • when is the boiler due for replacement
  • when is the roof due to be updated
  • do the windows need updating
  • when do appliances need replacing/repairs
  • any other repairs

Some of the above are optional and can wait until you have more money (upgrades/updates) and some you can do yourself (grass cutting, house keeping etc), but keeping them in mind even if you have to do them yourself might sway your decision on a bigger lawn/bigger house etc.

Rent vs Buy Costs

So how do these stack up against average rental and house prices in Ireland at the moment? Looking at the latest daft rental and housing reports for 2019 the average national monthly rent is 1,391€ and the average national house price is 257,114€. Below is a breakdown of estimated home ownership costs assuming 10% downpayment, no additional costs for energy, transport or major updates and using the standard 1% rule for maintenance costs (1% of the value of the home).

As you can see the total cost of owning a house worth 257,114€ with a 10% downpayment is 165€/month cheaper than renting (or 1,980€/year). You can do a similar exercise when comparing your own costs keeping in mind that any unplanned maintenance or once off upgrades will totally cancel out those savings. And trust me, once you own a house it’s really hard to stop updating it, something you wouldn’t do if you were renting.

Keeping within your limits

While we were building up a deposit for our home I had a spreadsheet that calculated how much we could save every month and what that meant in terms what price of house we could afford including purchase costs. I did my best to only look at houses we could afford at that point in time. Here is a chart as a guide to show you how much savings you need to buy a house at different price points.

At a high level based on the assumptions in the table below:

• for every 2,500€ you save you can afford 20,850€ more in house price
• for every 5,000€ you save you can afford 41,700€ more in house price
• for every 10,000€ saved you can afford 83,400€ more in house price

Table columns explained:

Savings is based on:

• 10% a downpayment (available to first time buyers) and
• purchase costs of 1% stamp duty, 1% legal fees, 150€ valuation and 450€ engineer report

House value is the amount your savings can purchase including purchase costs and 10% downpayment

Mortgage amount is based on 10% downpayment and a 30 year mortgage (if you will be in a position to invest alongside your mortgage payments then as you may have seen in this post, it can make sense to keep your mortgage payments as low as possible, worth noting is that some banks will only lend you up to the age of 65 so if either you or your buying partner are 36 or over you may only be able to get a 29 year mortgage or less which will increase your monthly payments.

Property tax is based on the 2014 base rate per house price.

Maintenance is based on 1% of the house price divided by 12 which is a general guide on how much money is needed to maintain a house at that worth

The new monthly cost includes the mortgage amount, property tax, maintenance (as listed) as well as life and home insurance and refuse estimated at 16€/30€/25€/month respectively keeping in mind this can obviously differ based on your own criteria.

Obviously if you need any immediate renovations, updates, upgrades, repairs or furniture then you will need to add that to your savings.

Something else I added to my own table was a column beside house price and reduced the house price by 15% to know what list price I should be searching for online based on the fact that at the time houses were typically going for 15% above list/asking price. For example: I didn’t want to search for houses listed at 250,000€ if houses listed at that typically were going for 287,500€, in that case I would only search for houses listed at 212,500€ so that I wasn’t tempted to go over what I currently had saved.

Negotiations

It can be hard not getting into a bidding war when you’ve been searching for a home for a long time but if keeping costs down is your main concern then this part is the most important to take a hard line on. In our case we were up against other bidders, one was a cash buyer, which had us losing hope but that buyer’s cash was coming from another country and could have been tied up and delayed. We went in with a strong enough offer along with our mortgage approval letter from the bank as proof of funds, this ultimately swayed the sellers to go with us as they were hoping or a quick sale. There were also other offers on the table, pushing our price up but we asked if they had provided proof of funding, and a lot of the time they hadn’t – which was basically inflating our price even though they possibly hadn’t even gotten mortgage approval yet. By asking for this proof and providing our own I think we may have managed to keep the cost below what it would have gone to otherwise. Also keep an eye on the property price register to get a feel for what homes are going for in that particular area. This is what worked for us but there may be other tactics that work better so don’t take my account as gospel. Providing the proof of funding from the bank also shows the maximum you are approved for so if you are bidding much below that the auctioneer may take that to the seller and they could try to get more from you due to that so that tactic may only work well if you are bidding close to the maximum you are approved for (which would indicate to them that they will lose you as a buyer if they try to raise the price more).

Be prepared for delays

I can’t even remember what all of our delays were but for multiple reasons we went sale agreed in July and only got the keys after much pushing just before Christmas. Many other of my friends have experienced the same. This was a shock to my system as in Canada it only took a matter of weeks! In our case I think the main delay was that there was a chain of purchases taking place ie: we were buying a house from someone who was buying a house from someone who was buying a house etc and each seller needed their funds from their house sale to purchase their new house and any delays anywhere along that chain pushed our sale back. Things that can help are to get a good mortgage broker and a good solicitor who will help to push things through as quickly as possible on your side. Shoot me a message if you’d like to know who I used. I’d gladly recommend them.

Searching for a mortgage

I use this website for comparing mortgage rates, it sorts the results in order of cheapest monthly cost to most expensive however do keep note of the APRC rate as often the bolded rate is an introductory rate for the first 2 years and then the remaining 28 are charged at a higher rate, or there are hidden admin fees which drive that actual rate higher. For example: there is a rate of 2.3% listed with KBC but when you click on see details it shows 2.3% for 2 years and 3.3% for 28 years as well as the lending criteria that you need to have a current account with KBC.

There is nothing stopping you from taking the introductory rate if you think you will be in a position to switch in 2 years time but while this can be done it requires you to basically apply for a mortgage all over again along with solicitor costs etc so if there is anything in your circumstances that changes and you are no longer in a position to qualify for a mortgage you could be stuck paying the higher rate. For example: This has happened to me in both my Irish and Canadian mortgages. In the Canadian mortgage we have looked at switching but since we’ve been in Ireland we’d need to fly to Canada to sign documentation in person order to get the better broker rates so when you add in the cost of flights home for both of us it outweighed the savings we would be making. In Ireland, I went on extended mat leave and so we are down to one income and no longer in a position to apply for another mortgage even though we had more than a years worth of living expenses in cash our broker advised we would be better holding off until I was back to work. Not being able to switch has probably cost us about 1,000€/year on both properties even after legal and discharge fees (some of which would be covered by the bank you move to). Anyway all that to say, you may have all the intentions in the world to switch after the 2 years but life happens and you may not be in a position to so take the APRC into account!

And that’s a wrap on all the nuggets I can think of from our home buying experience here in Ireland. I hope that was useful and as always please let me know if I’ve missed anything in the comments below.