ADVISING house buyers to pick the mortgage with the best long-term value is about as useful as suggesting they choose a property with friendly neighbours.
The nice family next door could decide to move at any time, to be replaced by somebody with a more relaxed attitude to good neighbourly relations. Mortgages are equally unreliable. A deal that looks attractive today could turn into the mortgage from hell after you have signed on the dotted line. This is when your lender is free to consign you to the ranks of its existing customers, expected to pay a steadily increasing interest margin to subsidise the cashback, introductory discounts and other goodies that will be thrown at the next generation of borrowers.
In the absence of a specific price promise, which no lender is willing to provide, terms such as long-term value become meaningless. Fixed rates offer certainty for a time but, when they run out after two, three or five years, you find yourself back at the mercy of your lender.
KBC Bank seems to be offering something different. Its advertisements and website promise first-time buyers “the lowest monthly mortgage payments over the term of your new mortgage”. With mortgages available for up to 35 years, this looks suspiciously like long- term value. Too good to be true? Take comfort from KBC’s boast of providing “non-gimmicky mortgages”.
The Fair Mortgage Rates Campaign, which wants a better deal for borrowers stranded with uncompetitive deals, believes KBC’s promise is unambiguous.
“It clearly intends to match the lowest mortgage payment offered by any other lender over the next 20 to 30 years,” said campaign founder Brendan Burgess. “It looks like a valuable commitment with no conditions attached.”
The campaign has not always been so supportive of KBC, taking it and other lenders to task over their dual-pricing strategies, with one rate for existing customers and a much better one to win new business. The campaign secured election pledges last week from representatives of Fine Gael, Fianna Fail and Sinn Fein that they would outlaw the practice if in government after the general election.
When asked for specifics, KBC assured The Sunday Times its promise could be taken at face value: “The wording refers to a comparison of KBC monthly repayments over the term of the mortgage against a competitor’s repayments over the same term based on today’s rate, which shows that KBC has the lowest monthly repayment. It is comparing like with like in looking at lifetime value.”
Except that it isn’t. Right now and using today’s rates, KBC can rightly claim to have the lowest variable rates — if you are a new customer who also opens a current account at the bank. However, its promise of lifetime value is based on the assumption that the current gap separating it from the competition will persist over the full term of the mortgage, which could be up to 35 years.
This is a big assumption that should have been spelled out. It is also a worthless assumption because, without an explicit promise to match whatever the competition comes up with over the coming decades, there is no way that KBC or its customers could know that its monthly payments will consistently be the lowest over the term of a mortgage.
After further questions from The Sunday Times, KBC promised to tone down the message in the coming days to read: “now the lowest monthly repayments over the term of your new mortgage”. It will also specify that its claim is based on “current market rates” and add a warning that “rates may vary over the term of a mortgage”.
Just like your new neighbours.
FUNDS’ UPHILL BATTLE
You would have to be brave or foolhardy or both to take risks at a time when investment markets are in turmoil and nobody seems to know why.
There is one investment, though, that comes with minimal risk and a good chance of matching whatever you might earn by putting your money into stocks or bonds over the next decade. The national solidarity bond is guaranteed by the state, the minimum investment is just €50 and it pays a return of 25% after 10 years.
This works out at an average of 2.26% a year, which does not seem like much until you consider that an investment fund would have to generate about 5% a year to achieve the same result. That might have been achievable in the bull run since 2008 but now looks optimistic.
The handicap for funds is that any money they make is taxed at 41% while the national solidarity bond is tax free. Why take risks when you can be reasonably certain that, after tax, your return is unlikely to be much more than you could earn by leaving your money safely in the post office?
The problem is not the tax- free status of the national solidarity bond. Governments the world over offer similar incentives to encourage citizens to invest their savings in the national debt. The issue is the penal tax on funds.
Investors will find it hard to make money in 2016. It does not help when the taxman takes almost half.