Moderator's note: for anybody who is thinking of switching their mortgage (or re-fixing with their current lender), consider posting your mortgage details in the switcher thread (in the format shown in the first post). Someone will calculate an estimate of the break fee (if any) and of the savings you would make from switching (or from re-fixing). Even if your mortgage is with Ulster Bank, you can still re-fix with them. Re-fixing with your current lender is simpler and usually quicker than switching to another lender.
Understanding Fixed Rate breakage costs (Updated May 2019)
Summary
The manner in which lenders calculate their breakage costs is set down under new legislation introduced in 2016.
The interest rates charged by the lender to their customers are not relevant.
As of now, May 2019, the rates at which banks lend to each other is close to zero. If you fix now, there will only be a breakage fee if either:
1. Rates fall further, or
2. Rates remain at this low rate, but time has passed so your break fee is measured against a shorter time frame.
How it works:
When you seek to break a fixed rate mortgage early, the breakage cost can't be more than the difference between the rate the bank was able to borrow money at for the original term in the inter-bank markets, minus what they can get for depositing the money in the inter-bank markets for the remaining term, times the remaining term.
If you are paying off a lump-sum, rather than the entire balance, the breakage fee is only calculated on the lump sum amount.
Breakage fees are calculated on inter-bank market rates, so are independent of any pricing decisions a bank makes in setting rates charged to customers.
More details below, with worked examples using theoretical scenarios.
Fixed Mortgage Rates - what if variable rates go down?
We probably all remember (or may even have experienced ourselves) quotes of 10K and more for people to break mortgages when rates fell in the past, particularly when rates fell rapidly after the initial reaction to the financial crisis in 2009. It's a memory that frightens many people away from fixing their mortgages.
However, those large break costs were the result of 2 factors:
1. Actual market rates (bank funding costs) were coming down dramaticaly, and it cost banks money to break their fixed hedging early, and
2. There was a bit of 'wiggle room' in how banks calculated breakage costs.
Calculating Breakage costs
Since 2016, the calculation is governed by the 'European Union (Consumer Mortgage Credit Agreements) Regulations 2016' http://www.irishstatutebook.ie/eli/2016/si/142/made/en/print
I have included a table below showing how each lender currently calculates break costs, as per their T&C's.
The regulation unfortunately doesn't specify exactly how the breakage is to be calculated, but it is quiet specific that the cost to the consumer should not exceed the financial loss to the bank. A bank must provide a written breakage quote to the consumer, and list all assumptions used. All assumptions must be reasonable, and justified.
What this boils down to is that the breakage cost can't be more than the difference between what the bank was able to borrow money for for the original term in the inter-bank markets, minus what they can get for depositing the money in the inter-bank markets for the remaining term, times the remaining term.
If market rates remain as they are now, to break a 2 year rate taken now in 1 year's time would cost approx 0.2% of the balance.
In the case of a rising interest rate market, the resulting breakage could be Nil.
Taking a fixed rate mortgage is really taking a view on the wholesale interest market for the next few years.
NOTE: Time remaining on fixed rate is a variable in the calculation of the break fee. So if you are exiting a 10 year fixed contract, a small move in interbank rates is multiplied by 10 so can result in a material break fee. For example a 0.2% fall in 10 year interbank rates (which has happened so far in 2019) would result in a break fee of 2% of the mortgage balance.
Some theoretical Examples:
Example 1 - I fix and I break immediately
I fix my rate with Bank of Ireland today for 2 years at 3.2%.
I decide 1 month later that I want to switch to EBS to get the 2% cash back from them.
The rate BoI borrowed from the market last month, and the rate they can get for lending to the market today is the same, so there might be a marginal breakage cost.
(In this case there might be a marginal breakage cost, as there are dealing costs in settling fixed rate contracts)
Example 2 - The rates at which banks lend to each other fall
I borrow €100,000
I fix my rate with Bank of Ireland today for 2 years at 3.2%. BoI's funding rate in the market is 0%.
After one year, I decide I want to switch to another lender.
The one year inter-bank Market rate is now -0.4% in the market.
Bank of Ireland can relend to the market at -0.4% instead of the 0% they borrowed at so the breakage fee is
€100,000@ 0.4% x 1 year = €400
Example 3 - rates rise
I borrow €100,000
I fix my rate with Bank of Ireland today for 2 years at 3.2%. BoI's funding rate in the market is 0%.
After one year, I decide I want to switch to another lender.
The one year interbank rate is now +0.25%.
Bank of Ireland can relend at +0.25% instead of the 0% they originally borrowed for, so there is no cost to them, so there is no breakage fee to the customer.
Can I Overpay without a Penalty?
A question that pops up in a few threads discussing fixed rate mortgages is whether or not you can overpay during the fixed rate term before the bank check if a break fee is payable.
From what I can gather each of the banks rules are as follows (any corrections welcome). See this thread for updated information.
I have based this on each Banks Terms & Conditions. I won't comment on whether the banks system / processes can be circumvented as these system failures cannot be relied upon:
AIB: No early repayments allowed without checking break fee
Bank of Ireland: The greater of EUR65 or 10% of normal repayment each month. However, this is done by increasing monthly repayment, and can’t be paid in as a lump sum. There are examples on AAM of posters who have set up a monthly overpayment, while on variable, being able to continue this once they have fixed, and got confirmation from BOI on same.
EBS: No early repayments allowed without checking break fee
KBC: 10% of the initial balance can be repaid early at any stage during the term without incurring a break fee. This is a cumulative limit of the fixed term, so if for example you have fixed for 5 years, and you overpay by 10% of the balance in year 1, that's your limit used up for the 5 years.
PTSB: No early repayments allowed without checking break fee
Ulster Bank: 10% of the balance at the beginning of the calendar year can be repaid each year without triggering a break fee calculation.
Finance Ireland: can overpay 20% of current balance in any 12 month period. Only single overpayment, not monthly amounts.
How does each lender calculate their Break Fee?
I have included below a summary of the fixed breakage fees in place across all the major mortgage providers in Ireland (wording paraphrased in some cases).
As mentioned in an earlier post, AIB base their break costs on the difference between your fixed rate, and their fixed rate currently applicable for the remaining period.
ALL the other banks base break costs on market rates of some description - whether cost of funds, deposit rate available, or interbank SWAP rates.
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Non-bank lenders may have higher breakage fees because their funding models are different. Worth challenging any high break costs, as the break cost cannot be more than the actual cost to the lender.
Understanding Fixed Rate breakage costs (Updated May 2019)
Summary
The manner in which lenders calculate their breakage costs is set down under new legislation introduced in 2016.
The interest rates charged by the lender to their customers are not relevant.
As of now, May 2019, the rates at which banks lend to each other is close to zero. If you fix now, there will only be a breakage fee if either:
1. Rates fall further, or
2. Rates remain at this low rate, but time has passed so your break fee is measured against a shorter time frame.
How it works:
When you seek to break a fixed rate mortgage early, the breakage cost can't be more than the difference between the rate the bank was able to borrow money at for the original term in the inter-bank markets, minus what they can get for depositing the money in the inter-bank markets for the remaining term, times the remaining term.
If you are paying off a lump-sum, rather than the entire balance, the breakage fee is only calculated on the lump sum amount.
Breakage fees are calculated on inter-bank market rates, so are independent of any pricing decisions a bank makes in setting rates charged to customers.
More details below, with worked examples using theoretical scenarios.
Fixed Mortgage Rates - what if variable rates go down?
We probably all remember (or may even have experienced ourselves) quotes of 10K and more for people to break mortgages when rates fell in the past, particularly when rates fell rapidly after the initial reaction to the financial crisis in 2009. It's a memory that frightens many people away from fixing their mortgages.
However, those large break costs were the result of 2 factors:
1. Actual market rates (bank funding costs) were coming down dramaticaly, and it cost banks money to break their fixed hedging early, and
2. There was a bit of 'wiggle room' in how banks calculated breakage costs.
Calculating Breakage costs
Since 2016, the calculation is governed by the 'European Union (Consumer Mortgage Credit Agreements) Regulations 2016' http://www.irishstatutebook.ie/eli/2016/si/142/made/en/print
I have included a table below showing how each lender currently calculates break costs, as per their T&C's.
The regulation unfortunately doesn't specify exactly how the breakage is to be calculated, but it is quiet specific that the cost to the consumer should not exceed the financial loss to the bank. A bank must provide a written breakage quote to the consumer, and list all assumptions used. All assumptions must be reasonable, and justified.
What this boils down to is that the breakage cost can't be more than the difference between what the bank was able to borrow money for for the original term in the inter-bank markets, minus what they can get for depositing the money in the inter-bank markets for the remaining term, times the remaining term.
If market rates remain as they are now, to break a 2 year rate taken now in 1 year's time would cost approx 0.2% of the balance.
In the case of a rising interest rate market, the resulting breakage could be Nil.
Taking a fixed rate mortgage is really taking a view on the wholesale interest market for the next few years.
NOTE: Time remaining on fixed rate is a variable in the calculation of the break fee. So if you are exiting a 10 year fixed contract, a small move in interbank rates is multiplied by 10 so can result in a material break fee. For example a 0.2% fall in 10 year interbank rates (which has happened so far in 2019) would result in a break fee of 2% of the mortgage balance.
Some theoretical Examples:
Example 1 - I fix and I break immediately
I fix my rate with Bank of Ireland today for 2 years at 3.2%.
I decide 1 month later that I want to switch to EBS to get the 2% cash back from them.
The rate BoI borrowed from the market last month, and the rate they can get for lending to the market today is the same, so there might be a marginal breakage cost.
(In this case there might be a marginal breakage cost, as there are dealing costs in settling fixed rate contracts)
Example 2 - The rates at which banks lend to each other fall
I borrow €100,000
I fix my rate with Bank of Ireland today for 2 years at 3.2%. BoI's funding rate in the market is 0%.
After one year, I decide I want to switch to another lender.
The one year inter-bank Market rate is now -0.4% in the market.
Bank of Ireland can relend to the market at -0.4% instead of the 0% they borrowed at so the breakage fee is
€100,000@ 0.4% x 1 year = €400
Example 3 - rates rise
I borrow €100,000
I fix my rate with Bank of Ireland today for 2 years at 3.2%. BoI's funding rate in the market is 0%.
After one year, I decide I want to switch to another lender.
The one year interbank rate is now +0.25%.
Bank of Ireland can relend at +0.25% instead of the 0% they originally borrowed for, so there is no cost to them, so there is no breakage fee to the customer.
Can I Overpay without a Penalty?
A question that pops up in a few threads discussing fixed rate mortgages is whether or not you can overpay during the fixed rate term before the bank check if a break fee is payable.
From what I can gather each of the banks rules are as follows (any corrections welcome). See this thread for updated information.
I have based this on each Banks Terms & Conditions. I won't comment on whether the banks system / processes can be circumvented as these system failures cannot be relied upon:
AIB: No early repayments allowed without checking break fee
Bank of Ireland: The greater of EUR65 or 10% of normal repayment each month. However, this is done by increasing monthly repayment, and can’t be paid in as a lump sum. There are examples on AAM of posters who have set up a monthly overpayment, while on variable, being able to continue this once they have fixed, and got confirmation from BOI on same.
EBS: No early repayments allowed without checking break fee
KBC: 10% of the initial balance can be repaid early at any stage during the term without incurring a break fee. This is a cumulative limit of the fixed term, so if for example you have fixed for 5 years, and you overpay by 10% of the balance in year 1, that's your limit used up for the 5 years.
PTSB: No early repayments allowed without checking break fee
Ulster Bank: 10% of the balance at the beginning of the calendar year can be repaid each year without triggering a break fee calculation.
Finance Ireland: can overpay 20% of current balance in any 12 month period. Only single overpayment, not monthly amounts.
How does each lender calculate their Break Fee?
I have included below a summary of the fixed breakage fees in place across all the major mortgage providers in Ireland (wording paraphrased in some cases).
As mentioned in an earlier post, AIB base their break costs on the difference between your fixed rate, and their fixed rate currently applicable for the remaining period.
ALL the other banks base break costs on market rates of some description - whether cost of funds, deposit rate available, or interbank SWAP rates.
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Bank | R1 | R2 | Source / Notes |
AIB (method 1) | the fixed interest rate applicable at the start of the fixed interest period | the fixed interest rate applicable as at date of premature payment/conversion, for the unexpired fixed interest rate period | https://aib.ie/our-products/mortgages/Home-Mortgages-Regulatory-Information |
AIB (method 2) | the cost of funding at the start of the fixed interest period | the cost of funding applicable as at date of premature payment/conversion, for the unexpired fixed interest rate period | https://aib.ie/our-products/mortgages/Home-Mortgages-Regulatory-Information (paraphrased - AIB updated T&C's April 2019 - they calculate on 2 methods, and quote customer based on the lowest of the 2) |
Haven | original cost of funds – The cost of funds for Haven for the fixed rate period at the time the fixed rate period commenced. | cost of funds for the fixed rate period remaining – Fixed rate period. The cost of funds used will be as of 5pm the day previous to the request to calculate the early redemption charge. | https://www.havenmortgages.ie/useful-information/regulatory-information#false |
EBS | original cost of funds - The cost of funds for EBS for the fixed rate period at the time the fixed rate period commenced. | cost of funds for the fixed rate period remaining - Fixed rate period. The cost of funds used will be as of 5pm the day previous to the request to calculate the early redemption charge. | https://www.ebs.ie/mortgages/home-mortgages-regulatory-information |
BOI | the annual percentage interest rate which was the cost to us of funding an amount equal to “A” for the originally intended fixed rate period | the annual percentage interest rate available to us for a deposit of an amount equal to “A” for a period equal to “D” | https://personalbanking.bankofireland.com/borrow/mortgages/information-and-legal-notices/ |
KBC | The Fixing Rate prevailing at the date of the existing fixed rate applying to the loan was set (Fixing rate is Cost of Funds) | The Fixing Rate prevailing at the switching/redemption date for the unexpired time period of the Fixed Rate Period (Fixing rate is Cost of Funds) | [broken link removed] |
PTSB | “I” is the swap/market fixed interest rate for the term of the Fixed Rate Period at the date of its commencement | “S” is the swap/market interest rate for the remaining fixed period, | [broken link removed] |
Ulster Bank | means the interest rate available to the lender for funds placed in the money market on the start date of the relevant fixed rate period for the duration of the relevant fixed rate period | means the interest rate available to the lender for funds placed in the money market on the date of the proposed early repayment, lump sum repayment or interest rate conversion for the remainder of the relevant fixed rate period. | http://digital.ulsterbank.ie/personal/mortgages/fixed-rate-mortgages.html Note, in addition to this, Ulster Bank cap all break fees as 6 months interest, so break fee can never exceed 6 months interest |
Non-bank lenders may have higher breakage fees because their funding models are different. Worth challenging any high break costs, as the break cost cannot be more than the actual cost to the lender.
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