A website to work out savings from breaking a fixed rate

[Zenith63]

Update: the website referenced in the current thread does not estimate the break fee / early breakage charge to break out of a fixed-rate mortgage. But you can get an estimated calculation of your break fee / early repayment charge / breakage cost by supplying your mortgage details in this Key Post:

Key Post - Mortgage switching or re-fixing in Ireland – break fee calculations, interest rates and savings estimates for your case

I am creating this thread as a place where people can request guidance on whether they should switch their mortgage (also called mortgage refinancing or remortgaging) and, if so, which lenders and interest rates they might consider switching to. You are allowed to switch even if you are in the...

www.askaboutmoney.com

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For anybody else considering a break and switch to a fixed rate, wondering what the actual savings to you are, I threw together this [website] - [broken link removed]. You just stick in your current mortgage details (balance left, term left, rate) and the details of the fixed rate you're being offered plus the break fee and it will tell you how much you're monthly payments will come down during and after the fixed period, and most important what the total saving over the lifetime of the mortgage will be.

 

[Brendan Burgess]

As the [website] deals with repayments rather than interest, it is fundamentally flawed and should not be used.

The only way to assess the cost of a breakage or switch is to compare the cost with the annual savings in interest.

For example, if the break fee is €1,000 and I save €500 a year in interest, it will take me two years to break even.

Brendan

 

[Zenith63]

I made it mostly out of interest for myself, so keen to understand where you see the issues?

Think you're saying that "Total saved during fixed period" is flawed right? It's inaccurately titled saying these are "savings" and should be labelled "total reduction in payments during fixed period"?

I don't think any of the other figures are incorrect or incorrectly labelled though? Particularly the one called "Total saving over the lifetime of the mortgage", which I say in the note is "the most important figure!" as this is indeed the saving in interest over the lifetime of the mortgage, which unless I'm mistaken is the figure that matters here?

For example, if the break fee is €1,000 and I save €500 a year in interest, it will take me two years to break even.

True, but what I was curious about here was cases that are not quite as clear-cut as that. For example a break fee of €1000 on a two year fixed term which saves you €400 per annum in interest. By your calculation you'd say that is not worth it, but if the mortgage has a good few years left to run, the increased capital repayments during the fixed term may mean the lifetime savings in interest are still higher than €1000, so you'd maybe break even at 3 years, 8 years etc.

 

[RedOnion]

@Zenith63
A useful calculator for full term analysis, but a bit difficult to explain and it's application to this specific analysis.

You are absolutely correct that with a shorter remaining term Brendan's crude calculation is also incorrect as the average balance reduces more rapidly.

I can think of lots of practical uses for your calculator if you've time to enhance it!

 

[Brendan Burgess]

Hi Zenith

You seem to fundamentally misunderstand how to make a decision on a mortgage.

Let's say I have a mortgage of €100,000 with 20 years left. I have two years left fixed at 5%
I can fix today for 3% for two years.

The cost of the mortgage is the interest charged and not the repayment made.

The savings are very easy to estimate.

A reduction from 5% to 3% is 2% a year.
That is a savings of €2,000 per year in interest on a €100,000 mortgage
For two years, that is €4,000 interest.

(It's actually a bit less than that because you are repaying capital, but that will not be material.)

If the break-fee is less than €4,000, then it is worth breaking. In most cases, the break fee will be a lot less than the savings.

There is no need to look at the life of the mortgage.
All that is relevant is the remaining fixed rate period.

You might argue that your calculator is useful in working out the savings in repayments over the life of the mortgage by switching from a variable rate of 5% to a variable rate of 3%. But that is an irrelevant calculation in practice. If I know that AIB will be 2% cheaper than BoI for the remaining 20 years of my mortgage, it would be relevant. But I know that that will not be the case.

By the way, you are not alone in this. The Central Bank requires lenders to how the total cost of credit which is totally meaningless in a long-term loan where the rate is variable and the borrower can repay it early or switch to a cheaper lender or cheaper rate.

Brendan