Key Post The right way calculate the savings from breaking out of a fixed rate (and the wrong way.)

Coat

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I just fixed for five years in April just gone, with KBC at 2.9% . My LTV is 52% and a mortgage of €270,000 . Would it be worth my while to break from my fixed rate and avail of the new 2.6% 5 year fixed rate announced today? I've read that some people have been told their break out fees could be zero. Any advice please?
 
I just fixed for five years in April just gone, with KBC at 2.9% . My LTV is 52% and a mortgage of €270,000 . Would it be worth my while to break from my fixed rate and avail of the new 2.6% 5 year fixed rate announced today? I've read that some people have been told their break out fees could be zero. Any advice please?
These new rates won't be available until 3rd September. So I'd suggest you request a break fee towards end of August and decide then. If break fee is less than 3,500 it'll be worthwhile. (It will be less than that).
 
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These new rates won't be available until 3rd September. So I'd suggest you request a break fee towards end of August and decide then. If break fee is less than 3,500 it'll be worthwhile. (It will be less than that).

Thanks Concrete.
RedOnion, Could you please tell me how you got the figure of €3500? By switching from 2.9% to 2.6% I'm coming up with a saving of €40 per month or €2400 over the 5 year fixed period, minus the break fee of €1141 leaves a saving of €1259? Is this correct?
 
Thanks Concrete.
RedOnion, Could you please tell me how you got the figure of €3500? By switching from 2.9% to 2.6% I'm coming up with a saving of €40 per month or €2400 over the 5 year fixed period, minus the break fee of €1141 leaves a saving of €1259? Is this correct?
Hi,
You're saving more than you think.
The 40 per month is your reduced repayment. However, at a lower interest rate you are repaying capital faster, so there's a long term saving.
Take 270,000 * 0.3% * 5
Your interest saving us about 810 per year.

@Brendan Burgess this is a brilliant example of a borrower being able to make savings by breaking and refixing. You might explain the interest savings bit better than I have.
 
This seems to be a very difficult concept for people to understand.

The cost of a mortgage is the interest charged and not the monthly repayment, as the monthly repayment includes a capital repayment.

The easiest way to explain this is to compare the interest charged with the repayment over various terms

Mortgage: €100,000 @ 3% interest

upload_2018-9-5_9-19-58.png


The monthly cost of this mortgage is the same for all three terms. The repayments are very different.

So let's look at the savings from an interest rate cut

Take a mortgage of €100,000 at 3% reduced to 2% with the same term of 20 years

upload_2018-9-5_9-18-24.png



Why, you might ask, does the repayment not go down by the interest? Because when interest rates are reduced, you pay off more capital with each repayment.

upload_2018-9-5_9-19-13.png


So after a year where the interest rate was reduced from 3% to 2%...

upload_2018-9-5_9-18-59.png
 

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