# Breakage fees keep going up and up with no explanation

#### Gabbro

##### New Member
Hi can anyone help me please?

In November 2018 I contacted my bank to request a break funding fee as the offers are good at the moment. I received a break funding fee of €1139 which would last 10 days. I decided to wait until Feb 19 to switch because there was a missed payment note on my account and I wanted to ensure I had a spotless 6 month record for the next bank. In Feb I asked for another quote and it was €6,166, Since then I have been ringing up every few weeks and the fee keeps going up and up, the latest being last week were it was over €10,000.

In the documentation that supports the breakage fee they give a formula (B=(W-M)xT/12xA) Where:
B = break funding Fee,
W=Wholesale rate prevailing at the date the existing fixed rate applying to the loan was set,
M= the wholesale rate prevailing at the switching/redemption date for the unexpired time period of the fixed rate period
T= Period of time in months to the end of the fixed rate period
A=Principal amount which is subject to the existing fixed rate and which is being switched or redeemed.

I have a number of issues.
Firstly they don't call out what the "M" figure is in the documentation and i'm no actuary so this is a transparency issue for me.
Secondly when I asked for the "M" figures they sent them out to me "eventually". So the Nov "M" figure was 0.23 and the Feb "M" fig was -0.06. My next question to them was where to they get these figures from and how do I know they didn't work backwards from the break out fee to get these. They never explained this

I am no expert so can anybody explain to me if I have a case here? To me it doesn't seem like there have been massive changes in central bank rates since last November so how can the fee vary so much? At a minimum there is a lack of transparency here but is there a bigger issue around trying to lock me to them? How can they prove That the "M" figure is truly the wholesale rate prevailing at the switching/redemption date for the unexpired time period of the fixed rate period.

Thanks

#### RedOnion

##### Frequent Poster
Wholesale funding rates have reduced significantly since the start of the year. The NTMA issued 10 year bonds at 0.1% yesterday - they were yielding 0.9% at the start of the year.

Which bank are you with?

#### Gabbro

##### New Member
Wholesale funding rates have reduced significantly since the start of the year. The NTMA issued 10 year bonds at 0.1% yesterday - they were yielding 0.9% at the start of the year.

Which bank are you with?
KBC - So what do you think?

#### RedOnion

##### Frequent Poster
KBC - So what do you think?
When did you originally fix (month / year) and for how long?
And what's your balance.
I'll do a check.

#### Gabbro

##### New Member
thanks

July 18 - july 22 (36 months left)
511,589 left
3.35% at fixing

#### RedOnion

##### Frequent Poster
thanks

July 18 - july 22 (36 months left)
511,589 left
3.35% at fixing
Was it a 5 year fixed with 4 years left?
Wasn't aware of a 4 year rate with KBC?

#### Gabbro

##### New Member
Was it a 5 year fixed with 4 years left?
Wasn't aware of a 4 year rate with KBC?
no 5 years with 3 left sorry I should have said july 17

#### RedOnion

##### Frequent Poster
no 5 years with 3 left sorry I should have said july 17
That makes more sense.

Ballpark, July 07 5 year swap rates were 0.27%
Currently 3 year swap is negative 0.36

So difference is 0.63%.

511k * 0.63% * 36/12 is close to 10k. Exact dates would vary it a bit.

Swap rates used from: https://www.theice.com/marketdata/reports/180

When you originally requested break fee in Nov, they would have used 4 year rate instead of 3 year, and rates have also fallen since.

#### Gabbro

##### New Member
So basically they are right and some rates seem to have changed significantly.
Do these change regularly. Would there be a point in me tracking them on a monthly basis to see if they go into positive territory again?

Thanks for your help

#### RedOnion

##### Frequent Poster
Unless the market has completely misread ECB intentions, there's no prospect of interest rates rising anytime soon.

So we've worked out the break fee is based on approx 0.65% difference in rates. So if you can move to a rate that much lower for the remaining term you'll recover the break fee in saved interest. So anything below 2.7% and you're in the money.

Some banks will add the break fee to your balance if you switch.

#### NoRegretsCoyote

##### Frequent Poster
Basically by choosing a five-year fixed rate you took insurance against rates rising. If it had gone the other way you'd be sitting pretty.

With regard to our query the bank are legally obliged to send you all of these figures in writing as often as you request them. If they refuse threaten them with the Ombudsman.

#### DMartin

##### Registered User
Just checked with BOI today, 17k to break out of my fixed rate!!!

#### NoRegretsCoyote

##### Frequent Poster
Just checked with BOI today, 17k to break out of my fixed rate!!!
How long is the term? How big is the balance?

#### DMartin

##### Registered User
How long is the term? How big is the balance?
about 30 years left, 190k remaining 10 year fixed rate locked in.

#### DMartin

##### Registered User
To be fair, I did the calculation using the the ICE historical rates (https://www.theice.com/marketdata/reports/180 provided from @RedOnion) between now and when I fixed for 10 years and the figures tally with what the bank said.

I asked about cost to come out of a 10 year fixed rate so I assumed that R% and R1% use the 10 year fixed rate and the 9 year fixed rate even though coming out of the fixed rate allows you to go on any fixed term or variable rate thereafter.. (open to advice on this @RedOnion)

This is what I did to calculate using the BOI formula as follows:

C = Ax (R% - R1%) x D / 36500

Ax = €190,000 - Remaining Principal Approx
R% = 0.927 - ICE 10 year Swap Rates as of AUG 2018 (Screenshot below)
R1% = -0.045 - ICE 9 year Swap Rates as of AUG 2019 - I used 9 years here since D = 9 years and is the annual percentage interest rate available to BOI for a deposit of an amount equal to “A” for a period equal to “D”. (Screenshot below)
D= 3285 days - 9 years remaining

C (Break fee) = €190,000 (0.927-(-0.045) x 3285/36500
= €190,000 x 0.972 x 0.09
= €16,621.20

I Would be grateful if someone could comment on whether the swap rates I used in the formula would be in line generally with inter-bank rates for the scenario outlined above, @RedOnion, @Brendan Burgess.

If I have applied the above calculation above correctly, in order to avoid a break fee, I will need to wait until the cost of funding or the "n" year ICE swap rate is above 0.927%.

"n" = no. of years left on fixed rate to determine interbank rate used.

Eg, if I did this calculation with 5 years of fixed rate remaining would I use the 5 year swap rate, ie "n" = 5 in the above calc ??

Regards,

DMartin

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#### NoRegretsCoyote

##### Frequent Poster
If I have applied the above calculation above correctly, in order to avoid a break fee, I will need to wait until the cost of funding or the "n" year ICE swap rate is above 0.927%.
This looks broadly right to me, but I am not the expert on which precise rates to use.

BoI will send you out a worked example in the post if you ring them up. It will look a bit like this.

There is a small chance they are making a mistake in which rates they are using or calculations which could work out in their favour. It's unlikely though.

Otherwise obviously if interbank rates rise by a percentage point then you won't have a breakage fee. The problem is that at that point retail rates are likely to be higher too.

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#### DMartin

##### Registered User
Exactly right @NoRegretsCoyote. They sent me two of these a year ago when I enquired. The first was after my initial inquiry where the EuriBid investment rate was about -0.09 for a 3 year term. I decided to confirm a month later to exit the fixed term where they sent me another calculation. It was -0.23% next time round. This meant the break fee went from €0 to €500 at that time. I accepted it at the time. My confusion Lay on the word Euribid as It doesn't seem to be a term used anywhere outside of BOI. It seems the era of low interest rates is not over as many expected a year ago. ECB rate may go negative before the end of the year.

#### DMartin

##### Registered User
It is a pity that there is not more transparency in how banks arrive at these rates.

Given that I (and I am sure this applies to thousands of others) have been advised by the bank that a fee of almost €17k will be levied on me by the bank should I choose to exit a fixed term loan arrangement, I don't think it is unreasonable to expect full transparency on how these Euribid rates are calculated by said bank. @RedOnion's link is helpful but I wonder do these Euribid rates have additional "unknown" charges factored in.

The Bank should be obliged to disclose exactly how they generate the rate rather than quoting the rate as x, y, or z %. If the Euribid rates are the actual publicly available inter-bank rates then so be it but if not exact calculations of rates should be explained to the customer.

Regulation should be far more stringent on banks in general

#### EmmDee

##### Registered User
Exactly right @NoRegretsCoyote. They sent me two of these a year ago when I enquired. The first was after my initial inquiry where the EuriBid investment rate was about -0.09 for a 3 year term. I decided to confirm a month later to exit the fixed term where they sent me another calculation. It was -0.23% next time round. This meant the break fee went from €0 to €500 at that time. I accepted it at the time. My confusion Lay on the word Euribid as It doesn't seem to be a term used anywhere outside of BOI. It seems the era of low interest rates is not over as many expected a year ago. ECB rate may go negative before the end of the year.
EURIBID is the bid version or EURIBOR - they are the interbank bid and offered fixes. Normally reporting just focuses on the offered side (LIBOR, EURIBOR etc) as rates on most wholesale financing transactions are defined from the offered index - but the bid should be about .20% lower. It's not a BOI term but it does reflect the interbank market if they were to lend out that money in the market for that term.