How do lenders calculate cost of breaking a fixed rate?

KeyPoster

Registered User
Messages
26
hi there

i have a 3 yr fixed mortgage with AIB .we are only in year 1 of this agreement. with ECB cutting rates today and going to cut further what can i do here? if i pull out of the agreement here, will there be a penalty? what are the chances of my current bank offering me better rates to stay? do you need a solicitor to re-mortgage or is it all done via the banks

thanks
 

Dave Vanian

Frequent Poster
Messages
608
If you break a fixed rate the bank can charge you a penalty, but they might not - the only way to know for sure is to ask them. There should be no other cost involved.
 
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limerickboy1

Guest
according to AAM you have to pay legal fees and land registry etc again which could cost 1000
 

plant43

Frequent Poster
Messages
385
according to AAM you have to pay legal fees and land registry etc again which could cost 1000
That's only if you swtich lender. If you're staying with the same lender then all you might have to pay is whatever penalty they impose.
 
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limerickboy1

Guest
oh right. so you have to pay to move lender but not if you move from one product to another using the same lender???
 

plant43

Frequent Poster
Messages
385
oh right. so you have to pay to move lender but not if you move from one product to another using the same lender???
Pretty much. The lender may decide to impose a penalty on you if you're moving from their fixed rate to their variable rate package. Best thing is to ring your current lender.
 
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limerickboy1

Guest
ok i will. do u have any idea what the penalty could be, a cash sum , a % of the total mortgage?
 

NorfBank

Frequent Poster
Messages
2,103
Only your bank can tell you that.

It depends how much you breaking the fixed rate is going to cost them. If it costs them nothing then no penalty.

Basically if you are on a really low fixed rate they will be glad to take you off it, if you are on a high fixed rate (and making them money) there will be a penalty.
 

Kate10

Frequent Poster
Messages
236
Limerickboy,

We just broke out of our AIB 3 year fixed rate mortgage, only 6 months into the term.

You need to check your general conditions for the formula for breakout cost but ours worked like this:

They charged us the difference between our fixed rate, and the 3 year fixed rate they were charging on the day we broke out (so we fixed at 5.25% and the rate the day we broke out was 5.20% so difference is .05%) multiplied by the balance of your term (in our case 2.5 years) multiplied by the balance of your mortgage (say €500,000) = €625.

I think at that price you would be nuts not to break out with interest rates coming down the way they are.

The only thing is, you need to move FAST! As interest rates come down AIB will probably drop their 3 year fixed rate, which will mean that the cost of breaking out will go up. For examply, if AIB dropped their 3 year fixed rate from 5.20% to 5.00% next week, the breakout cost on a €500K mortgage (as per example above) would go up to €3,125, which is a lot more intimidating.

So if you are going to breakout, do it quickly!!

By the way all they need from you to do the breakout, is a letter signed by you and your cheque for the breakout cost.

Best of luck,

Kate
 

kopkidda

Frequent Poster
Messages
134
Limerickboy,

We just broke out of our AIB 3 year fixed rate mortgage, only 6 months into the term.

You need to check your general conditions for the formula for breakout cost but ours worked like this:

They charged us the difference between our fixed rate, and the 3 year fixed rate they were charging on the day we broke out (so we fixed at 5.25% and the rate the day we broke out was 5.20% so difference is .05%) multiplied by the balance of your term (in our case 2.5 years) multiplied by the balance of your mortgage (say €500,000) = €625.

I think at that price you would be nuts not to break out with interest rates coming down the way they are.

The only thing is, you need to move FAST! As interest rates come down AIB will probably drop their 3 year fixed rate, which will mean that the cost of breaking out will go up. For examply, if AIB dropped their 3 year fixed rate from 5.20% to 5.00% next week, the breakout cost on a €500K mortgage (as per example above) would go up to €3,125, which is a lot more intimidating.

So if you are going to breakout, do it quickly!!

By the way all they need from you to do the breakout, is a letter signed by you and your cheque for the breakout cost.

Best of luck,

Kate
Hi kate,

We fixed at 5.2%,the rate for 3 year fixed is still 5.2%,so going by your formula it should be free for us to change to a variable rate?
 

Kate10

Frequent Poster
Messages
236
Hi guys,

Paddy the letter should say something like this:

"Dear Sirs,

We refer to our mortgage ref no (insert number) and we write to instruct you to move our mortgage from our fixed interest rate of ( ) to your standard variable rate, with immediate effect.

We understand the breakout cost is (€ ) and we enclose herewith a cheque in that amount.

Please confirm receipt of this letter and cheque and confirm that interest on our mortgage will be charged at your standard variable rate.

Yours sincerely etc"

Kopkidda that is correct, assuming your general condition was worded in the same way ours is - I'd say they are standardised so it's probably the same.

Be careful if you ring AIB to check - when I rang I got a guy who pretty much told me that the cost would be such that there would be no benefit to moving, then told me that I should wait to see what they did with their interest rates. It was only when I took out our offer letter and read the terms that I realised he was way off. I think it was an innocent error but would have cost us a lot...
 
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Senna

Guest
Hi kate,

We fixed at 5.2%,the rate for 3 year fixed is still 5.2%,so going by your formula it should be free for us to change to a variable rate?
Is it not the difference between your current fixed rate and what the standard variable is.
 

brian1

Frequent Poster
Messages
54
Is it not the difference between your current fixed rate and what the standard variable is.
I thought the same at first, but no it is the difference between fixed rates. I'm currently going through the same process with AIB, as my fixed rate was 5.18%, there was no breakage fee :)
 

pepperds

Registered User
Messages
26
we are 16 months into a three yr fixed mortgage at 5.15%, BOI today told me the fee would be €5k plus. The agent told me very quickly so it's obviously information they hold on the screen under your account.

Struggling to understand how this amount is so high given the same fixed mortgage is currently 5.2%.
 

cloughy

Frequent Poster
Messages
175
well if you are fixed at 5.15 and fixed rates falling, if new fixed for 1.5years was 4.5% (current variable) so probable lower then the cost to bank would be

400k * 5.15-4.5% * 1.5years which would be 4k, thats how they would calculate the cost as they have hedged your fixed rate, so you can see how the cost could be 5k for another 1.5years.

also the fixed rate of 5.2% doesn't take account of latest 0.50% drop in AIB rates, know they reduced the variable not sure of impact on the fixed rates, and also you would be better looking at teh fixed rtae for 2yrs as thats what they would need to cover since 20months to go on yours.
 

pepperds

Registered User
Messages
26
Got ya - I was reading the current fixed rate compared to ours, whereas the bank is hedging of course. Thanks for explanation, no complaints yet with our rate although anything lower is a benefit
 
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