This is a question that has been asked several times on AAM since the last two ECB cuts and with further rate cuts around the corner it is one that needs to be discussed. These are the main questions that need to be asked.
1) Will there be a penalty for breaking the fixed rate mortgage?
In the case of the early repayment of a fixed rate loan the banks use the following formula to calculate whether there is a penalty and the size of that penalty.
(Amount x (R - R1) x Time) divided by 36500.
Amount = Mortgage outstanding
R = Costs of funds for the bank for the fixed rate period (i.e the rate on your loan offer)
R1 = Interest rate available to the bank for funds placed on date of early repayment.
Time = Number of days between date of early repayment and en of fixed rate period.
Trying to put this as simply as possible:
Banks make money, if you are on a high fixed rate relative to prevailing interest rates they will charge you a penalty for coming off it, if you are on a relatively low rate they will be happy for you to pay it back so they can lend it elsewhere at a higher rate.
If there is no penalty or just a small one then read on. If the penalty is large then use a calculator like www.jeacle.ie/mortgage/ to see if you can save more than the penalty by switching to a variable rate.
2) Why did I fix in the first place?
The main reason most people fix is so that they know exactly what their mortgage repayments will be for a certain fixed period. It gives them certainty and helps them to budget. If this is the reason you went on the fixed rate and if you are comfortably making the repayments then maybe you should stay on the fixed rate. You are paying more on the fixed rate but you are paying for certainty.
If you fixed just to time the market and think you got it wrong then read on.
3) Will there be other fees involved in switching?
Some lenders will charge an administration fee to switch between fixed and variable. If you are switching lenders to avail of a better tracker rate then there will be legals fee of around €1000. Some lenders still offer a free switch or a contribution towards legal fees.
There will be a valuation fee of €130.
4) Can I afford to switch lenders?
Is your LTV low enough to switch lenders since the recent falls in house prices. If your mortgage is over 90% of your house value then it is likely that you will have to stay wit your current lender. As the credit policy of lenders has tightened recently, you may not be eligible for the same mortgage as you borrowed in the past.
5) Are variable rates really that good?
Variable rates may look good now but what if banks refuse to pass on future rate cuts or even worse, what if they start to raise rates. It’s unlikely but the banks are within their power to do what they like with their own variable rates.(In the UK half of the banks and building societys did not pass on the last rate cut).
If there is a more severe credit crunch, could you see variable rates go higher than the fixed rate you come off? As I said it’s unlikely but possible with these pesky bankers.
The beauty of variable rates is their flexibility, you can choose a variable rate and just sit on it and wait for either fixed rates to come down to a really attractive level or the introduction of a new product by the lender (EURIBOR tracker anyone). There is no penalty (maybe an administration fee) for coming off a variable rate. There is no penalty for overpaying, paying backs lumps sums or redeeming a variable rate loan early (unlike with fixed rates).
Still interested in changing? Then speak to your broker or lender. Depending on the fixed rate you are on, it could make sense for you to switch especially with another reduction in the near future not being ruled out by the ECB.
1) Will there be a penalty for breaking the fixed rate mortgage?
In the case of the early repayment of a fixed rate loan the banks use the following formula to calculate whether there is a penalty and the size of that penalty.
(Amount x (R - R1) x Time) divided by 36500.
Amount = Mortgage outstanding
R = Costs of funds for the bank for the fixed rate period (i.e the rate on your loan offer)
R1 = Interest rate available to the bank for funds placed on date of early repayment.
Time = Number of days between date of early repayment and en of fixed rate period.
Trying to put this as simply as possible:
Banks make money, if you are on a high fixed rate relative to prevailing interest rates they will charge you a penalty for coming off it, if you are on a relatively low rate they will be happy for you to pay it back so they can lend it elsewhere at a higher rate.
If there is no penalty or just a small one then read on. If the penalty is large then use a calculator like www.jeacle.ie/mortgage/ to see if you can save more than the penalty by switching to a variable rate.
2) Why did I fix in the first place?
The main reason most people fix is so that they know exactly what their mortgage repayments will be for a certain fixed period. It gives them certainty and helps them to budget. If this is the reason you went on the fixed rate and if you are comfortably making the repayments then maybe you should stay on the fixed rate. You are paying more on the fixed rate but you are paying for certainty.
If you fixed just to time the market and think you got it wrong then read on.
3) Will there be other fees involved in switching?
Some lenders will charge an administration fee to switch between fixed and variable. If you are switching lenders to avail of a better tracker rate then there will be legals fee of around €1000. Some lenders still offer a free switch or a contribution towards legal fees.
There will be a valuation fee of €130.
4) Can I afford to switch lenders?
Is your LTV low enough to switch lenders since the recent falls in house prices. If your mortgage is over 90% of your house value then it is likely that you will have to stay wit your current lender. As the credit policy of lenders has tightened recently, you may not be eligible for the same mortgage as you borrowed in the past.
5) Are variable rates really that good?
Variable rates may look good now but what if banks refuse to pass on future rate cuts or even worse, what if they start to raise rates. It’s unlikely but the banks are within their power to do what they like with their own variable rates.(In the UK half of the banks and building societys did not pass on the last rate cut).
If there is a more severe credit crunch, could you see variable rates go higher than the fixed rate you come off? As I said it’s unlikely but possible with these pesky bankers.
The beauty of variable rates is their flexibility, you can choose a variable rate and just sit on it and wait for either fixed rates to come down to a really attractive level or the introduction of a new product by the lender (EURIBOR tracker anyone). There is no penalty (maybe an administration fee) for coming off a variable rate. There is no penalty for overpaying, paying backs lumps sums or redeeming a variable rate loan early (unlike with fixed rates).
Still interested in changing? Then speak to your broker or lender. Depending on the fixed rate you are on, it could make sense for you to switch especially with another reduction in the near future not being ruled out by the ECB.