Advice needed urgently prior to drawdown

Dear All. Hope you can advise.
My wife and I have just lodged signed letter of acceptance with BOI for a 130,000 euro mortgage. Reasons for new mortgage are 1. educational (two sons about to start college) + 2. consolidation of existing mortgage and other loans. Breakdown will be roughly 60k to existing loans and balance 0f 70k set aside for use over the next four years.
I am 54, my wife is ?? and, if we were not changing and increasing mortgage, we would have been mortgage-free in 8 years when I will be 62. Instead now we will pay this new mortgage off over 10 years and be mortgage-free 'when I'm 64'! ♫
We lodged and were accepted by three companies; BOI, AIB and ICS (with whom we currently have our existing mortgage).
For various (valid to us) reasons we plumped for BOI
Now they are offering the following over 10 year mortgage:
Variable 2.25 APR 2.3 Repay 1210.54 pm
2 yr fix 2.99 APR 2.8 Repay 1254.24 pm
3 yr fix 3.39 APR 3.0 Repay 1278.24 pm
5 yr fix 3.99 APR 3.7 Repay 1314.74 pm
The variable rate of 2.25 is because the LTV is less than 50%. All three fixed rates offered are 'new business' and are only on offer prior to drawdown.
No matter what rate we choose it will represent a considerable increase on monthly repayments compared to what we are used to paying up til now. (over 100% )
If we fix at 2 yrs, we pay 43.70 over the variable monthly repayment
If we fix at 3 yrs, we pay 67.70 over the variable monthly repayment
If we fix at 5 yrs, we pay 104.20 over the variable monthly repayment
Because the situation 'out there' is so completely up in the air we are stuck about making a decision on what to do re rates.
The conventional wisdom re fixing (peace of mind etc) may, at this point, not be as valid as heretofore.
Our thoughts, up until all the imponderables happened (TSB, banks arguments re needing to raise rates because of differential between borrowing rates and rates to savers, the possible ramifications for NAMA and hence mortgagees from the Supreme court judgement re Liam Carroll, this morning's news re Canadian bank's interest in AIB etc, etc, etc!) had been to go variable, pay the 1210.54 pm, set up the new mortgage a/c as a nominated a/c (through banking 365 online) and, if at all possible, pay an extra 100 pm off the capital. That way 1. the term would decrease, 2. if we had a bad month we could keep the 100 'back', 3. if/when rates increase we can adjust the extra we are making downwards and still not 'feel the pain'. Also, we are concerned that if we fix for 2 or 3 years, we will be hit by ECB rate rises when we come back to variable when the fixed period finishes. The extra 104.20 pm needed for the 5 year fixed seem to us to be 'dead money'.
Now we just don't know WHAT to do.
The only other option is to fix a portion and keep the rest variable.
The bank did suggest we might like to pay extra but the flaw for us is that they only calculate the overpayments at end of year, so its better to pay off extra by the month.
I realise that this topic crops up on many threads and that one would need to be the wisest seer ever to be able to predict what really will happen, but if any of you have thoughts/advice on our options as matters stand now, then I would be most grateful. We expect to be committing to a deal early next week.
Thanks for reading
Fitzney

I think your plan eminently sensible but then I generally would as I think that fixed rate is usually a bank's best friend. Things to consider would be ... You feel comfortable with the current repayment. Up to what level will you be comfortable? Would you be able to handle say an interest rate that is say 4.25% or 5.25% or 6.25%? Don't forget that as you are clearing other loans with this you will have fewer demands on your income.
That is probably the most important question. Personally, I'd be inclined to take the risk and go for the variable and overpay. That way you clear the debt quicker, and pay less interest overall.

Thanks for reply so-crates. No, I don't feel comfortable at all! I've never had to borrow so much in my life so am concerned about the whole thing. However, as we see things, we really have no choice.
Bank did state that effect of a 1% increase on the var. of 2.25% on the 130,000 euro 'in the first year' would be 60 euro approx., whereas the 2 yr 2.99% fixed would be 47 euro over the variable. Given TSB have effectively broken with the 0.25% increases/decreases that appeared to be the new norm, all it would take would be two increases of .5% each to be up at 3.25 (increases on variable 2.25)I don't know how to calculate the various other rates you mentioned. Is it all just a guessing game essentially 'placing a bet. The only problem appears to be that the race-course has changed so completely that nobody knows how the horses should run!

Borrowing €70k up front to pay for college seems a bit steep. You might be better off trying to pay for it out as much as possible on a year by year basis or get the sons to either work part time or take out a student loan (hard enough to do these days I guess)

DerKaiser said:

Borrowing €70k up front to pay for college seems a bit steep. You might be better off trying to pay for it out as much as possible on a year by year basis or get the sons to either work part time or take out a student loan (hard enough to do these days I guess)

Click to expand...

Borrowing 70k upfront because 1. sons going to Dublin to college, therefore more expense 2. our ages (have two existing policies that cover new loan so reckon we are saving on that) and 3. the general economic climate. Who is to say but that maybe I'll be out of a job this time next year. Don't want to appear pesemistic but is anyone's job secure anymore?
We were reckoning on dividing it up over the four years as needed, so only yr 1 would be on a more readily accessible savings account. We could tie up the rest as appropriate to needs etc. and, if the manure was to hit the fan, then could pay off mortgage with the 50 odd k in savings a/c. It would mean my sons would be in trouble but at least the banks would only be into us for 50/60k and not 120/130.
Fully intend for sons to get part time jobs IF THEY CAN given the climate.

So you are borrowing money now for your sons' college in case the *&^ hits the fan but if it does hit you will probably use that money to pay back part of the loan. I am at a loss as to the benefit of borrowing the money now if you would pay it back if your financial circumstances deteriorated. Have you inquired about a loan with multiple draw downs (stage payments) where you only pay interest on the amount drawn down?

I think you have a very well placed sentiment planning for your childrens education however there are very few courses that do not leave plenty of time for a student to fund themselves. Architecture, engineering, medicine, science can be very time intensive and leave little time for part time jobs. You should also be able to factor in the cost of rent reducing in Dublin and the general cost of living for a student coming down. No Aldi back in my day !

There is probably some scope to balance the amount you are borrowing and the schedule for drawing down the funds with your parental sense of responsibility.

Hi Ontour. I may have caused confusion. We are not borrowing now ‘in case the ???? hits the fan’. We are simply forward-planning for our two son’s college education, starting this Sept. I have no good/valid reason to believe, at this time, that my job is anything but secure. However, given the strange twists and turns of Mother Ireland’s grotesque dance right now, a certain Donald Rumsfeld’s ‘known unknowns, unknown unknowns etc.comes to mind! It makes sense to us to borrow now given 1. our ages, 2. the fact that we are seen by three banks as good bet right now, 3. the only certainty being that all is uncertain in the Irish economy/financial system. Believe me, the idea of repaying some of this money is the doomsday plan and would only be invoked if I suddenly found myself unemployed. I suppose I should have just left things at the concept of borrowing this money in a manner that will allow us the most control over it.
We did enquire about loan with multiple drawdowns. In fact, when it came to mortgage companies we asked such of each bank/society (stage payments). It was a non-runner because of reasons for loan. Further, given our current borrowings are comprised of existing mortgage, credit union load and the dreaded credit card, it makes sense to amalgamate these plus educational funding into one monthly outgoing.
As regards students part-funding themselves with part-time jobs, well the big question now must be will they be able to get part-time jobs given Ireland’s current/future economic mess.
Re Aldi: there was none back in my day either. My poor mother took in lodgers to pay for my education in London…………..and I sat over there in the main drinking my head off!!!!! Lets hope there is not, in this case, a certain symmetry to life!

Hi
Re your point about fixed vs variable - we too are hopefully going to drawn down on a mortgage switch (to AIB) next we and are going to fix for 5 years. Our reasons are:
1. we aren't on a tracker and are getting stiffed at the moment on the variable rate from our (foreign) lender
2. we had a fixed rate of 3.45% from march 06 to march 09 - missed out on the rate increases so have seen the benefit of fixed rates
3. whatever about when ECB rates increase - we are concerned about the extra profit margin the bailed out irish banks are going to have to squeeze out of their non tracker customers
4. we are going to be paying hefty childcare bills over the next 4 years so there isn't that much scope for us to afford it if interest rates went north of 5%.
5. while we might be able to make an educated guess at what might happen over the next 6 or so months but given that ECB is at historic low I'd be surprised if at a rate of 3.86% over 5 years wouldn't work out a good value.
6. we've no plans to move house during the next 5 years

I absolutely take the point made earlier that banks price fixed rates to make sure they lock in a profit margin, so the bank usually wins BUT for us, the extra 1% we are paying as the cost of fixing at what we are pretty sure is the bottom of the interest rate cycle - it is a cost worth paying.

Good luck with your decision
dishwasher

Deciding whether to fix (or not) depends on your attitude to risk. Personally I'm against doing so because I believe the deal is heavily weighted in favour of the bank. When do you ever hear of someone benefitting from being on a fixed rate? 99 times out of 100 it's an expensive mistake. I think your idea of opting for the variable rate and paying the extra €100 off the capital outstanding is a good one. Yes, France and Germany are showing signs of recovery which could trigger a rise in interest rates. But in your circumstances unless €1,315 is the absolute maximum repayment you can afford and anything more would tip you over the edge financially, I think you should opt for the variable rate.

I don't see why you should borrow all the money up front especially as you don't want to be so much in debt. You have some savings and could use this to pay for this year? Then you could save the money you would have paid for the mortgage to fund next year etc? If you lose your job and are unable to pay for your son's education will you not then be eligible for student grants/accommodation?

Agree with Bronte - if you saved 1,200 per month, you'd have more than enough to support your sons' education.

If you are taking a mortgage, I'd go with a tracker as the first option (have you asked the bank for one?) or variable as the second. Fixed rate mortgages are a luxury product that in the vast majority of cases cost more.

Think about it this way. Interest rates are 1% now. The 5 year fixed quoted is just under 4%. For you to win over the five years, variable interest rates would have to AVERAGE over 4% for the entire 5yrs. Too many people mistakenly think that interest rates going above 4% during the period is justification for getting a fixed. Its not. The 5 year fixed is 2% above the current interest rate. Therefore interest rates would need to be 4% above the current rate for the same period of time for you to win.

csirl
The best variable rate I can get is 2.65% - the 5 year fixed rate is 3.86% - a difference of 1.21%. I am expecting the gap between the bank's variable rate and ECB (currently 1.65% given my LTV) to increase over the period. So even if the ECB AVERAGES 2% over the next 5 years then I win. Up till this year, 2% was I think a historic low.

The banks aren't offering trackers any more - I accept the decision is different if you have one.

For me though the key factor is your individual circumstances and the level of increasing interest rates you can take - so not a decision about luxury but affordabilty.

d

Hi fitzney,

My husband and I recently fixed our enormous mortgage for 4 years at 3.57%. We are with AIB and we moved from our variable rate of 2.25% resulting in a very significant increase in our monthly payment.

Before making our decision we researched historical interest rates over the past 20 years. Our research showed that interest rates of between 3 and 4% represent historically low rates.

Secondly, we believe that economic recovery in mainland europe is likely to lead to an increase in the ECB rates early next year. I think that Irish banks will start to raise rates as soon as there is an increase in the ECB rates. I also think it is likely that the increases will be a little larger than the increase in the ECB rate. All in all, I think that by the end of next year, the lowest standard variable rate will be somewhere between 3 and 4%. I doubt very much if the current fixed rates will be available by the end of this year/beginning next year.

The last reason that influenced us to make our decision is that we really can't afford to pay much more than 4 - 4.5%. An increase like this would me too much for us to manage with salary cuts etc. We are willing to take the risk of paying a little bit more overall to ensure that we don't face that sort of interest rate until things have recovered a bit.

That was the logic behind our decision.

As for your own logic in borrowing early - I don't see anything wrong with that. After all, you can deposit the money you do not need to use immediately and get a rate similar to what you are paying on your mortgage. If your sons need less than anticipated the balance can go to your mortgage at some point in the future.

Best of luck whatever you decide.

Kate.