BOI charging me €18,194 to break from 10-year fixed rate mortgage

[friday2018]

I'll try and keep this as brief as possible. I have 2 properties:

Property 1 - Tracker Mortgage with Ulster Bank. 15 years remaining and current balance of €150,000.

Property 2 - 10-year Fixed rate with BOI at 3.3%. 24 years remaining and current balance of €407,000.

I am selling the Property 1 and UB have agreed to transfer the remaining balance to property 2 at a rate of ECB + 2% and fund the remaining balance of circa €257k at a 5-year fixed rate of 2.5%.

Problem is BOI wrote to my solicitor this week and demanded a "Funding Fee" of €16,593. I rang today to query the charge and they told me it has now increased to €18,194. I asked for a breakdown of the calculation and the girl I spoke to said they would send out the method of calculation which was driven by the difference between the cost of the funds to them when they lent me the money and what they can achieve on the deposit market now. However, they would not be able to disclose to me rates they were using or their quantum.

I am only 1 year into the 10-year term and when I entered into the fixed rate agreement I read a lot of articles about the EU Mortgage Directive and how it would mean little or no breakage fees due to the low interest rate environment. Clearly, not so.

My questions are as follows:

1 My high-level understanding of the EU Mortgage Directive was to ensure that banks could only charge customers the cost to the bank of the customer breaking out of fixed rates. The formula used by BOI to me would seem unfair as their 10-year fixed rate is now 3.6% which means in essence they can now make a greater return on the funds repaid by myself. Is this formula used by BOI prescribed by the EU directive or is it BOI's interpretation of the EU directive?

2 As part of my mortgage offer I was entitled to 2% cashback. I would also been entitled to a further 1% cashback after 5 years (circa €4,000). Should this not be deducted from BOI's "loss" as they won't have to pay this as a result of me breaking out of the agreement?

3 What should my approach be with BOI if they are continue to refuse to provide the detail behind the calculations?


Thanks for any help!

 

[RedOnion]

it would mean little or no breakage fees due to the low interest rate environment. Clearly, not so.

The theory was that interbank interest rates were so low, they couldn't get any lower. And therefore the break fee would be minimal (if any).
Unfortunately, it hasn't turned out like that. Eurozone interest rates have fallen even further since late last summer. To put it in context, the yield on 10 year German government debt is just below 0%. Investors are willing to pay the government to take their money for 10 years!

At a bank level borrowing level, 10 year funds were costing roughly 1% a year ago, and just shy of 0.5% now.

Is this formula used by BOI prescribed by the EU directive or is it BOI's interpretation of the EU directive?

Unfortunately the mortgage credit directive didn't prescribe a formula, so there are some subtle differences in the calculations across the banks. However, the banks cost of funds that matters. When you fixed, the bank hedged that rate in the market. They now incur a fee to break that fix. The fact they are willing to lend new funds at a lower rate isn't relevant, as they can lend different money at that rate - it's not connected to your mortgage.

2 As part of my mortgage offer I was entitled to 2% cashback. I would also been entitled to a further 1% cashback after 5 years (circa €4,000). Should this not be deducted from BOI's "loss" as they won't have to pay this as a result of me breaking out of the agreement?

No. The 1% is to try keep you as a customer. If you leave, they aren't earning a margin over the next 4 years, so their 'lost profit' is actually quite high.

3 What should my approach be with BOI if they are continue to refuse to provide the detail behind the calculations?

I've never actually seen one, so I don't know how detailed they are.
Again, the MCD isn't prescriptive:
"
(5) Where a consumer seeks to discharge his or her obligations under a credit agreement prior to the expiry of the agreement, the creditor shall provide to the consumer without delay after receipt of the request, on paper or on another durable medium, the information necessary to consider that option. That information shall at least quantify the implications for the consumer of discharging his or her obligations prior to the expiry of the credit agreement and clearly set out any assumptions used. Any assumptions used shall be reasonable and justifiable."

However, since there is a requirement for the break fee to be justified, I think they should have to explain it if you require them to justify it:
"(2) A creditor shall be entitled to fair and objective compensation, where justified, for possible costs directly linked to the early repayment, but shall not impose a sanction on the consumer, and any such compensation shall not exceed the financial loss of the creditor."

 

[NoRegretsCoyote]

Problem is BOI wrote to my solicitor this week and demanded a "Funding Fee" of €16,593. I rang today to query the charge and they told me it has now increased to €18,194. I asked for a breakdown of the calculation and the girl I spoke to said they would send out the method of calculation which was driven by the difference between the cost of the funds to them when they lent me the money and what they can achieve on the deposit market now. However, they would not be able to disclose to me rates they were using or their quantum.

Either she got this wrong or you misunderstood her.

You are entitled to a worked example of the cost of breaking out in writing. The rate they use fluctuates daily but you can request this every day if you want to.

As @RedOnion has explained the assumption is that the amount you repay early is deposited on the interbank markets for the remaining nine years. BoI specifically uses EURIBID. I think you can only access this with a Bloomberg terminal.

In general there is no way out of this if you want to go ahead with this strategy. You wanted insurance against mortgage rates rising for nine years. You don't want this anymore because, amongst other thing, rates have fallen. So it's reasonable that the bank gets costs covered.

 

[friday2018]

Guys, thanks very much for the feedback - greatly appreciated.

I have received the letter from BOI now outlining their calculation and it is indeed EURIBID they use. Is there any way I can check historical movements on EURIBID so I can (a) check the calculations (b) assess likely future movements ?

 

[NoRegretsCoyote]

Guys, thanks very much for the feedback - greatly appreciated.

I have received the letter from BOI now outlining their calculation and it is indeed EURIBID they use. Is there any way I can check historical movements on EURIBID so I can (a) check the calculations (b) assess likely future movements ?

On a) - I don't know where you can check the rate.
On b) - This would just be guesswork.

What you should do in any case is double check the calculations they have sent you using the formula. They once sent me something completely wrong.

I can do this via PM if you want either.

 

[Sunny]

You won't get access to 10 year euribor/euribid rates. Only 5 rates up to 12 months are publically available with a 24 hour delay. Whether this is right or wrong since they are using the index to price retail products is a different argument. It is unlikely that the bank are misleading you about the rates. As Red Onion says, rates have fallen since you fixed as hard as that is to believe. Check the calculation but I would imagine that is going to be break cost.