€0 break fee - break fixed now or wait for further rate cuts?

[NewIreland]

4yrs left on a 5yr fixed term with BOI.

I'm interested in longish term fixed rates, so have been tempted by the KBC 10yr fixed offering.

I phoned BOI to investigate cost of breaking my current fixed rate early and was told my break fee is €0! So good news. However like others here I was also told that number may vary from day-to-day in future. When I said I might switch BOI also offered a new 5yr fixed rate 0.1% under my current (and the currently advertised) rate.

So my question (regardless of whether I switch or refix with BOI) is should I move quick to grab the €0 break fee or can I afford to wait a few months to see if other banks produce better offerings? Is this zero break fee likely to be reasonably stable? Or is there a high risk it’ll go up and so would I be better to break immediately?

 

[RedOnion]

The break fee is calculated based on market (interbank) interest rates.

In your case, the rate of 4 year money now is equal to, it above, the rate of 5 year money when you first fixed a year ago. Interest rates have started to rise slightly.

For you to be charged a break fee, market interest rates would have to fall.

Nobody here has a crystal ball to know what will happen.

Personally, I suggest you take the best rate you can get right now.

Just bear in mind that a very small change in market rates could result in a break cost to you - e.g a 0.1% drop could cost you 1200 on a 300k Mortgage (but your saving moving to s cheaper rate should be far far greater).

 

[NewIreland]

Thanks RedOnion. And thank you for your thread on understanding fixed rate breakage costs, which was very helpful for context on this and encouraged me to look into it in the first place.

Your walk through helps clarify the interplay between the interbank rates and any break fee I might face. I think I have the framework clear in my head now.

You've reinforced my instinct to take the best rate I can find now rather than risk facing a non-zero breakage fee in a few months - like you say no one has a crystal ball.

 

[RedOnion]

I'm glad you found it helpful. Please let me know if there's anything that could be explained clearer to help others.

If you change now and there's an even better rate available in s few months, there shouldn't be a material difference between break fee on your mortgage then Vs what it would be if you don't change now.

 

[NewIreland]

I'm glad you found it helpful. Please let me know if there's anything that could be explained clearer to help others.

Your explanation is very clear and thorough it's just the framework is a bit counter intuitive. By which I mean the fact that increasing interbank rates are good for the mortgage holder (as regards a break fee), while declining interbank rates are bad. It's an inversion to how you normally think about mortgage rates. Also the fact that the advertised consumer mortgage rates have no bearing on the calculations isn't what you'd immediately expect either.

If you change now and there's an even better rate available in s few months, there shouldn't be a material difference between break fee on your mortgage then Vs what it would be if you don't change now.

Yes that point just struck me too. Zero break fee implies little difference in interbank rates between now and when I fixed last year. So fixing again now should make little material difference to a break fee if I want to try switch again in future - the rate that any future rate will be compared to will be similar whether I stay on my current offer or move over to a new fixed term. It's something that hadn't struck me when I started thinking about this and another factor in favour of breaking now rather than waiting.

 

[NewIreland]

Two quick technical questions:

(1) I can find the Irish 3mth Irish interbank rate easily online (e.g. CSO) but are longer (1yr, 5yr, etc.) Irish interbank rates readily available online?

(2) Also do you know are the banks using a daily spot rate for breakage fee calculations or do they use a weekly or monthly interbank rate? Basically I'm wondering if I phone and check my breakage fee is still zero and send in my refix instruction that day there isn't likely to be a change in that breakage fee when the bank executes that instruction a day or two later?

 

[RedOnion]

Unfortunately EURIBOR is only quoted up to 2 years. I don't have Bloomberg access to get rates, so I use swap rates as a proxy (PTSB actually use swap rates in their t&cs).
https://www.theice.com/marketdata/reports/180

I suspect banks are using previous day rate feeds, or possibly weekly updates. Rates are pretty stable at the moment so it's unlikely that there'd be that much movement in a single day.

 

[NewIreland]

Just a quick update in case anyone is interested. I decided to refix with BOI at the slightly reduced rate to what I'm on now - gives a small saving for little work. I called them this morning to check my break fee and today it is €100 (up from the €0 it was a few weeks ago when I first checked). This would suggest the 4yr interbank rate today is very close to the 5yr rate from when I fixed last year - it must have been a bit higher when I first called and a bit lower now (about 0.01% lower by my calculations).

It's a modest enough break fee for 4yrs at a reduced rate but the reduced rate is only 0.1% under my current rate so the savings are modest too and I don't want to pay for the refix if I can avoid it. I've a few weeks left on the rate offer they've issued me so I might try again in a week or so and see if I can catch a €0 break fee day. They said if I fax in the authorisation form via a branch I should be able to catch the break fee quoted for that day (rather than post it in and risk a higher break fee a day or two later).

For a switch with bigger savings the fluctuations in break fee from €0-100 wouldn't really be material, but for a modestly improved refix I'd prefer to avoid a break fee if I can.