Buyers of older homes may pay thousands more per year in mortgage repayments

The news last week that Bank of Ireland was to base the cost of a fixed-rate mortgage on the Ber of the property involved is just the latest evidence of the home loan markets’ move to go green. The new Bank of Ireland plan offers a range of discounts based on the Ber – abandoning the old metric of loan-to-value as a key differentiator of the cost to the borrower.

This is the latest evidence of the trend of offering significant discounts to those buying more energy-efficient homes – with the cheapest loans available to those buying A-rated new-builds. The trouble is that there are not enough newly built homes on the market to satisfy demand – and so two thirds of first-time buyers and the vast bulk of mover purchasers are buying older properties, the vast bulk of which have lower BERs. And so their mortgage costs are higher.

So is this a reasonable tactic by the banks to try to encourage buyers to “go green”, or is it unfairly penal to those who are buying a second-hand home?

Mortgage broker Michael Dowling says he has concerns that the second-hand buyer is “paying the price” and often has no other option at a time when there are not enough new-builds on the market. Also, many buyers of older homes will not have the resources to increase the rating on their home in the short term and thus qualify for a cheaper loan.

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Buyers of older homes may pay thousands more per year in mortgage repayments

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While everyone supports the goal of making homes more energy efficient, he said, there can now be a significant gap between the interest rate paid on a home with a high rating and a less energy-efficient one – and as the latter represents the majority of houses sold, the banks still benefit from higher rates on a majority of their loan books.

Greening of the market

The Bank of Ireland move is the latest evidence of the “greening” of the mortgage market, initially led by AIB, which introduced attractive fixed rates to borrowers with better BERs.

The biggest discount is 0.35 of a percentage point on an A-rated home and the smallest is 0.05 of a point on a G rating (which would usually only apply to a vacant or abandoned property)

To date, most of the products on the market have just been a straight choice between a lower interest rate for an A/B rating or a higher rate for a less favourable rating. However, Bank of Ireland has taken this a step further, offering a matrix of rates based on the six different BERs of A to G.

This works as a discount on the basic rate which applies for a house with no Ber, gradually increasing as the house gets more energy efficient. The biggest discount is 0.35 of a percentage point on an A-rated home and the smallest is 0.05 of a point on a G rating (which would usually only apply to a vacant or abandoned property).

So, for example, the bank’s three-year fixed rate is 4.75 per cent for a home without a Ber, 4.65 per cent for a house with a F rating, 4.55 per cent for a D rating, 4.5 per cent for a C and 4.4 per cent for an A-rated home.

This differs fundamentally from what is on offer elsewhere for two reasons. One is the discount – albeit smaller – for lower BERs, which would give some savings to purchasers of many second-hand properties. The other is that Bank of Ireland no longer charges less for lower loan-to-value (LTV) loans, which has been a central factor in the market for many years.

When property prices collapsed after the financial crash, it was owners with higher LTV loans who suffered most – the infamous 100 per cent mortgages came home to roost. And so, since then, banks have been more comfortable with lower LTV ratings – and the Central Bank has imposed an LTV limit of 90 per cent.

AIB, for example, offers different fixed mortgage rates across three LTV bands – under 50 per cent (which could happen if the buyer has substantial cash or is carrying forward equity from the sale of another house), between 50 per cent and 80 per cent, and over 80 per cent. This applies to so-called higher value loans – of €250,000 plus – as well as its general lending. Bank of Ireland’s move away from LTV is thus a new and somewhat surprising development in the market, which will be attractive to some potential borrowers, but not to others.

Mind the gap

A significant gap has now opened up in many cases between so-called “green” rates and ordinary mortgage-lending rates, particularly for those who choose to lock in to fixed rates. And only a minority qualify for significant “green” discounts.

Figures from the Banking and Payments Federation Ireland show that last year close to 17,000 first-time buyers bought second-hand homes compared to 8,600 who bought new-builds. The gap is, not surprisingly, is even greater for mover-purchasers. So the majority of new lending is at higher “non-green” rates; Bank of Ireland’s new offering does alter this to some extent by offering some discount on lower BERs. But across the board the gap still exits.

Second-hand homes are often cheaper – and the gap is growing. Over the past year their price has increased by 1.6 per cent, compared to 9.2 per cent for a new dwelling, according to the latest CSO figures

For borrowers from AIB, for example, a five-year fixed interest rate loan for a property with an A or B Ber attracts a rate of 3.55 per cent (based on an LTV of between 50 and 80 per cent) while a “normal” loan for a house with a lower rating would could 4.8 per cent. That is a big gap. According to Dowling, for a borrower with a €300,000 loan over a 35-year term and a 90 per cent LTV, the difference in monthly repayments would be €283 per month or €3,396 annually.

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In the context of interest-rate trends, the green rates – which AIB has just cut – look quite attractive, while the non-green rates look expensive, as interest rates are expected to fall generally in the months ahead. However the AIB rates for “non-green” borrowers are in line with much of the rest of the market. At Permanent TSB, the ordinary five-year fixed rate (for a 60 per cent to 80 per cent LTV) is 4.95 per cent, while its comparable green rate is 4.25 per cent.

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So for borrowers there is now a clear incentive to buy a newer, energy-efficient home in terms of the offers available on the mortgage market – and also from the Government Help-to-Buy and First Home Schemes, which both apply only to first-time buyers of newly built homes. Second-hand homes are often cheaper, however – and the gap is growing. Over the past year their price has increased by 1.6 per cent, compared to 9.2 per cent for a new dwelling, according to the latest CSO figures. However, supply on the second hand market is also low, meaning a bidding war for houses that do go up for sale.

A complex world for borrowers

The “greening” of the market, together with the increased differentiation between loan rates for fixed and variable, different terms and in most cases LTV and so on, have introduced significant complexity for borrowers. Higher-value loans over €250,000 also have different rules, too. For many it is worth talking to a mortgage broker, which can often be done without incurring a charge – and even if not it is a good investment to avoid a potentially costly mistake.

For those who do not qualify for a green rate in particular, it is worth carefully assessing the options and your preferences. If you want to stay fixed then it might be worth considering a shorter-term fixed rate

There are a few key points to look out for – and they go beyond the pure interest rate on offer. One, with fixed rate products, is whether additional repayments are allowed if, for example, you get a bonus or come into an inheritance – and here rules differ across the market. A second is whether there are cashback incentives – these should not blind the borrower to more expensive interest rates, but of course cash is always nice.

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And of course, it is also worth carefully considering interest rate options. Here, shopping around applies, particularly for those taking out new loans. For those who do not qualify for a green rate in particular, it is worth carefully assessing the options and your preferences. If you want to stay fixed then it might be worth considering a shorter-term fixed rate – so as not to lock in for too long at a high rate – or looking for the better value currently on offer here, for example, from Avant, which typically charges around 4 per cent for its fixed-rate product.

Another option is to go on a variable rate for now, with the plan to move to a fixed rate when costs come down. AIB and Bank of Ireland both have standard variable rates of 4.15 per cent, while Haven also has competitive variable offers. The rates on offer often vary relating to LTV and other factors. For many other lenders, variable rates are still higher.

The extent to which fixed rates will fall as the year goes on remains unclear, as they have not gone up as much as ECB rates. But in many cases the fixed rates on offer of 4.5 per cent to 5 per cent for lower-Ber houses do look expensive, given an outlook of lower interest rates. Value is starting to appear for the greener borrowers, but elsewhere in the market a bit more competition is still needed.