Economic Letter: Mortgage holders could save significant amounts by switching, but switching activity remains low

• Three in every five eligible mortgages stand to save over €1,000 within the first year if they switch mortgage provider, and more than €10,000 over the remaining term.
• Just 2.9% of mortgages switched provider in the second half of 2019.
• A diverse range of factors may inhibit switching, including psychological factors, lack of knowledge on the costs and benefits, and the perceived complexity.

The Central Bank has today (29 October 2020) published an Economic Letter entitled “Room to improve: A review of switching activity in the Irish mortgage market”. Authored by Shane Byrne, Kenneth Devine, and Yvonne McCarthy, the Letter provides a detailed review of switching activity in the Irish mortgage market. It estimates the potential for savings available to mortgage holders and highlights some of the potential barriers to mortgage switching in Ireland.

The Letter finds that in recent years, there has been an increase in switching activity among private dwelling home (PDH) borrowers. However, switching activity remains low relative to the outstanding pool of eligible switchers, and stood at just 2.9% in the second half of 2019. These findings suggest that there is a low appetite among eligible borrowers to engage with mortgage switching options in Ireland. This is despite downward movements in interest rates and the recent introduction of policy initiatives designed to improve the switching process.

A large number of mortgage holders could see significant reductions in repayment costs by switching. The Letter finds that three in five (62%) PDH mortgages which are eligible to switch could save more than €1,000 within the first 12 months if they switch to the best available rate in the market. Of those that are eligible to switch, 72% stand to save over one-tenth of their annual repayment cost. Moreover, 61% of eligible switchers could save over €10,000 over the remaining term of the mortgage.

The research also finds that the distribution of potential savings from switching varies depending on the type of borrower and their age profile. It suggests that there are higher average potential savings among younger borrowers and first time buyers (FTBs). The Letter finds that 81% of switchers opt to take up a fixed mortgage, and the average interest rate payable among switchers is almost a full percentage point lower than non-switchers.

The Letter also examines potential barriers to mortgage switching among different types of borrowers. Behavioural characteristics may pose a barrier to customer engagement, and the Letter also finds that those with lower levels of financial literacy and education are more likely to exhibit a high degree of inhibition to switching. Notably, this high inhibition category includes a higher share of first-time borrowers, and borrowers who took out mortgages during the peak years of the housing boom.

These insights underline the importance of policy design that takes into account the diverse obstacles that may influence patterns of engagement and inertia in the Irish mortgage market. This is especially important in cases where household action correlates with existing sources of vulnerability among consumers.

Although outside the period of research, the COVID-19 pandemic has placed pressure on a significant number of borrowers and may, understandably, dampen switching activity. The Central Bank has also published an infographic and explainer to raise consumer awareness and understanding of mortgage switching rules.

Notes

• For the purposes of the Letter, a customer is defined as eligible for mortgage switching if they hold a variable rate product (excluding tracker mortgages) or a fixed rate product with fewer than 12 months of fixation remaining. Research sample is restricted to those accounts with a current outstanding balance of at least €30,000, a loan-to-value of below 90%, no outstanding mortgage arrears, and classified as ‘performing’.
• In June 2018, the Central Bank introduced changes to the Consumer Protection Code 2012 to enhance facilitate and enhance the transparency of mortgage switching.
• Our Explainer on mortgage switching rules can be found in the Consumer Hub.