From BOSIs point of view having loans out to customers at 1.75% or whatever while the money is costing them 4% or whatever means that they are losing money on the deal each year. €2,250 per annum is my estimate. I don't know what the actual cost to BOSI is,( I doubt their own board actually knows) but the €2,250 should not be far off.
Generally banks finance themselves from month to month so the cost to them of your loan varies, it does not matter when you took out the loan. This is a very stupid way for banks to do business as any first year accountancy student could tell them and is the root cause of the crisis, but thats a different discussion.
So if you pay off your loan early the bank saves €2,250 each year, you should expect them to share this saving with you.
The second, separate, question is where will you get the money to pay off the loan, and what will that cost you, i.e. your cost of capital. If you have the money on deposit at 3% then it will cost you €1,250 a year to pay off the loan, so your discount would need to be more than this PER ANNUM.
To work this through with simple figures.
Mortgage 100,000 1 full year left at 2%. Interest cost €2,000
Cash on deposit €100,000 earning 3% interest. Income €3,000
Take the money from the deposit and repay the mortgage. You lose €1,000
BOSI would need to accept an offer of less than €99,000 to settle the loan before you are interested.
Multiply the discount required by each year left on the loan.
This ignores tax. Dirt on deposit interest and tax relief on loan payments if applicable both tend to reduce the amount of discount needed.
In summary €2,000 per €100,000 loan balance per year remaining seems like a good rule of thumb for a discount.
BOSI wants out of Ireland they may be willing to accept less. All the best to anyone trying this and please let us know how it goes.
Generally banks finance themselves from month to month so the cost to them of your loan varies, it does not matter when you took out the loan. This is a very stupid way for banks to do business as any first year accountancy student could tell them and is the root cause of the crisis, but thats a different discussion.
So if you pay off your loan early the bank saves €2,250 each year, you should expect them to share this saving with you.
The second, separate, question is where will you get the money to pay off the loan, and what will that cost you, i.e. your cost of capital. If you have the money on deposit at 3% then it will cost you €1,250 a year to pay off the loan, so your discount would need to be more than this PER ANNUM.
To work this through with simple figures.
Mortgage 100,000 1 full year left at 2%. Interest cost €2,000
Cash on deposit €100,000 earning 3% interest. Income €3,000
Take the money from the deposit and repay the mortgage. You lose €1,000
BOSI would need to accept an offer of less than €99,000 to settle the loan before you are interested.
Multiply the discount required by each year left on the loan.
This ignores tax. Dirt on deposit interest and tax relief on loan payments if applicable both tend to reduce the amount of discount needed.
In summary €2,000 per €100,000 loan balance per year remaining seems like a good rule of thumb for a discount.
BOSI wants out of Ireland they may be willing to accept less. All the best to anyone trying this and please let us know how it goes.
