It takes a lot of discipline and consistency to gather enough funds to get your 10% deposit together, especially in these times when the cost of our basic needs are growing rapidly.
Some Irish banks are now offering accounts which are specifically set up for those who are saving for a mortgage, that offer favourable terms. But are Mortgage Saver Accounts actually worth it?
In this blog post, I will go through some reasons why Mortgage Saver Accounts might be a good idea and any potential drawbacks.
The benefits of setting up a Mortgage Saver Account
Clearly show 6 and 12 months’ continuous regular savings to your bank
When looking to take out a mortgage with any bank, the most critical thing you will need to demonstrate to the bank is affordability.
The bank will need to be confident from looking at your monthly incomings, outgoings, and saving record that you can comfortably afford to keep up with the mortgage repayments. This is ever more important now, as interest rates are trending upward which is increasing the monthly repayments for borrowers.
If you can demonstrate this through the bank’s own mortgage saver accounts then you will be making life much easier for the bank and it will lead to far fewer questions, and back and forth with the banks credit team.
Avoiding missing savings targets
Things can get muddled when having your savings and the cash you need for day-to-day expenses all in one place. A surprise bill or unexpected price rise could result in you not hitting your savings targets without you even realising it. But you can be sure the bank will notice when they do their review.
A simple mistake could set you back months, so it is good practice to keep your mortgage savings in a separate account to make things clear and simple to track.
Some banks will give you a cash interest bonus
Some banks will offer you an additional cash interest bonus if you have a regular personal account, or mortgage saver account and intend to also draw down a mortgage with them.
One such bank that has this offer is Bank of Ireland. You will just need to save a minimum of €5,000 with them and you will receive a €2,000 cash interest bonus. But please note that this is before DIRT (Deposit Interest Retention Tax) is deducted.
The drawbacks of a Mortgage Saver Account
Higher interest rates
You would think that higher interest rates would be something positive to note about a mortgage saver account, but in reality, the interest rates offered by banks on these types of accounts are so minuscule that you won’t even notice that you have received any interest.
You would be lucky to get an interest rate of 0.25% AER (Annual Equivalent Rate). For a couple that has €30k sitting in their Mortgage Saver Account waiting to draw down a mortgage this would only equate to €75 over the space of a year before taking into account DIRT (Deposit Interest Retention Tax).
Inflation
When you have savings sitting in a mortgage saver account that is only earning minimal interest, then your overall purchasing power is being constantly eroded in times when property prices are rising.
According to the Residential Property Price Index, house prices in Ireland increased 9.8% in the 12 months to October 2022.
Trying to grow your funds at a rate of 10% more is not easy and it will involve taking on a significant amount of risk which most first-time buyers are unlikely to want to take on board. There have been very few well-performing asset classes over the last 12 months.
If you do have a tolerance for taking these types of risks then there are institutions that will invest your money for you over a short time-period.
DIRT
Even though the interest rates may be higher on Mortgage Saver Accounts, the interest income will still be subject to DIRT (Deposit Interest Retention Tax) which at the time of writing is 33% in Ireland.
You may be entitled to get refunded any DIRT paid in certain circumstances where you are a first-time buyer who either buys or self-builds a new residential property under the Help to Buy Initiative.
What banks/institutions offer Mortgage Saver Accounts?
There are very few products on the Irish market specifically tailored towards mortgage savers. Two worth checking out are:
Bank of Ireland: offer you an account with an interest rate of 0.25% and also they promise to give you a cash interest bonus of €2,000 if you meet certain saving criteria.
Zurich: as an alternative to Bank of Ireland, prospective home buyers could go with many of their saving plans. The benefit of Zurich is that your money will be invested and you don’t have to do any of the leg work.
Many other regular deposit accounts: Asides from the accounts already mentioned, whatever bank you use will have its own form of deposit account. Even though it may not be set up with the purpose of attracting mortgage savers, keeping a clear division between your personal and home savings will benefit you down the road.
Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.
