Rising interest rates make investigating a change of lender more compelling, writes Laura Slattery

Interest rates look set to move in the wrong direction for cash-strapped mortgage borrowers in 2006, with the most recent noises coming from the European Central Bank (ECB) hinting at an interest rate increase next month.

Following a quarter percentage point increase in its key interest rate last December, it is anticipated that the ECB's governing council will trigger another quarter-point rate hike at their next meeting.

What this could mean for debt-laden homeowners is roughly another €15-€50 tacked onto their monthly repayment - the exact amount of the increase they must pay will depend on the size and term of their mortgage, the interest rate they are currently being charged and whether or not the effect of the ECB rate increase is passed on in full by their mortgage lender.

Despite rising interest rates, hundreds of thousands of debt-laden homeowners could actually end up paying less interest this year by being pro-active and responding to new efforts by financial institutions to win their business.

Many people who have had their names on the deeds of their properties for several years - and have let their original lender take their monthly direct debits uninterrupted since - are repaying their mortgages on standard variable rates.

These rates are significantly higher than a newer generation of tracker mortgages, where the interest rate is also variable but formally "tracks" the ECB base rate.

The difference between a standard variable rate of 3.75 per cent and a typical tracker variable rate of 3.35 per cent might not sound like much, but on a €250,000 mortgage being repaid over 30 years, it works out at €56 a month.

And thanks to steadily climbing property prices, people who have owned their properties for more than a couple of years are also likely to have built up a lot of equity. As a result the size of their loan in relation to the value of their property - the loan-to-value (LTV) - will have fallen.

As mortgage lenders offer the lowest interest rates to borrowers with low LTVs, this makes the possibility of greater monthly savings even stronger.

Competition in the mortgage market is heating up, making it easy to offset the effect of the ECB rate increases by switching lenders and avoiding upfront legal costs.

Last week, Bank of Scotland Ireland introduced a new "Switch and Save" mortgage with the cheapest tracker rate in the market at 2.7 per cent, a margin of just 0.45 of a percentage point above the current ECB rate of 2.25 per cent. This rate applies to borrowers whose loans are less than 75 per cent of the value of their property - a higher rate is offered to people with higher LTVs.

Although the rate is variable and will move in line with the ECB rate, the margin will stay the same for a period of two years.

Someone who switches from a standard variable rate of 3.75 per cent to Bank of Scotland Ireland's 2.7 per cent rate could cut their monthly repayments by €144 a month, or €1,728 a year, based on a loan of €250,000 over 30 years.

At the end of the two-year discount period, the Bank of Scotland Ireland mortgage will track the ECB rate at a margin of 1 per cent.

Other lenders offer cheaper rates than this to borrowers whose loans are less than 60 per cent. But after the two-year discount expires, borrowers can always review their options and switch again.

Legal fees for remortgaging can range from €900 to more than €1,500. But it is becoming increasingly possible to avoid them.

Ulster Bank and EBS Building Society will pay all the transfer fees of people switching mortgages to them.

The main conditions at both lenders is that borrowers must use a solicitor from the lender's panel and they must not move on again within five years - if they do, they will have to reimburse the legal fees to the lender.

One cost that the homeowner will have to cover is the stamp duty payable on the mortgage deed, which is 0.1 per cent of the loan amount if it's €254,000 or more.

Last month, National Irish Bank (NIB) announced it would pay €1,000 for every mortgage of €100,000 or more that is moved to its competitive fixed rates from other lenders between now and the end of February.

The NIB rates - at 3.29 per cent for two years, 3.45 per cent for three years and 3.8 per cent for a five-year fix - are currently the cheapest fixed rates in the market.

The two- and three-year fixed rates are lower than many of the variable rates available, making them especially good value at a time when variable rates are expected to rise.

Entering into a long-term fixed-rate mortgage could make further switching moves costly, however, as lenders often charge hefty penalties known as redemption fees if the borrower wants to make an early exit from their fixed-rate contract.

Bank of Scotland Ireland has since gone one better than NIB, offering to give €1,000 toward legal fees and a further €150 to cover the cost of the property valuation.

But borrowers are not confined to these four lenders if they want to make a free switch. Some mortgage brokers offer to pay the legal fees if borrowers use their services, with no restrictions on how long the mortgage must stay at the new lender and a greater number of lenders to choose from.

For example, at NC Mortgage Brokers, the outstanding balance on the mortgage must be at least €250,000 to avail of the free switch, otherwise it will contribute €499 toward the cost of legal fees. It will also pay the valuation fee. At Primafinance.ie, the solicitor fees excluding outlays are paid on mortgages of €150,000 or more that are switched using the site.

Offers to pay legal fees are encouraging people to switch, according to Tice O'Sullivan, a financial adviser at Primafinance.ie. "Even though the remortgaging process is getting more streamlined, it's still a cumbersome task and a lot more complex than in other places such as the US. So the offers on legal fees take some of the sting out of it," he says.

"Remortgaging activity has increased during the past year, he adds.

"Primafinance.ie says such activity now accounts for around 40 per cent of mortgage business.

But playing the interest rate game is not the main reason for switching, O'Sullivan believes. Consolidating debts and releasing equity for another investment or home improvement are the most common prompters.

The trigger to switch mortgages normally comes when borrowers need or want additional funds to repay short-term debts, improve their properties or buy investment properties either here or abroad, agrees Sarah Wellband, adviser at mortgage brokers REA.

"Although they can get better rates at little or no cost, the interest savings on a monthly basis aren't that substantial and I think a lot of people dislike the paperwork and perceived hassle involved," she says.

"They also think there must be a catch when it comes to the fees-free product and I think that many borrowers still feel they have an obligation of loyalty to the bank or lender who helped them buy the house - crazy but true!"

Homeowners who are not particularly overwhelmed by relatively modest mortgage repayments may not even have noticed the effect of the last interest rate increase on their household budget.

But if further interest rate rises are inflicted on them via the inflation-watching policymakers at the ECB, they may start resenting their monthly burden a little more and investigating their switching options in greater numbers.