How to evaluate if it's worth breaking out of a fixed rate

[Zenith63]

This has been replaced by this thread

Key Post - How to evaluate if it's worth switching or breaking out of a fixed rate

Almost every post on this topic is wrong. No matter how often it is pointed out, people look at the wrong figures. They use mortgage calculators when they don't need them. Most of the time, you can do the figures in your head. Do not look at the monthly repayments - they are misleading Do...

askaboutmoney.com

 

[Brendan Burgess]

Hi Zenith

Look at the interest charged and not the repayments.

The reduction in interest is 0.39% (2.99% - 2.6%)
So the annual savings in interest are €416k @0.39% or €1,600
The savings over two years are €3,200

As the savings exceed the break-fee of €1,305, then it is worth breaking and re-fixing

Brendan

 

[RedOnion]

Correct, at a lower interest rate you repay capital faster, so the extra 1200 is reducing your balance.

 

[Brendan Burgess]

Other factors to consider:

1) Don't break until you are sure you are able to avail of the lower rate

• For example, KBC's new lower fixed rates are not available until 3rd September 2018, so don't break until then
  
• If you are switching to a new lender, it probably won't make sense to break out of the fixed rate until the switch goes through. It could take up to three months for the legal work to be done.

2) If you are relying on a revised valuation of your home, get the valuation first so that you know what your Loan to Value will be

3) While you are at it - is it worth paying down some capital to bring you into a lower LTV category? For example:

House value: €200k
Mortgage €121k
Loan to value: 60.5%

If you reduce your mortgage balance to €119k by paying €2k capital

House value: €200k
Mortgage €119k
Loan to value: 59.5%

Rate will be 2.6% instead of 2.65% giving an annual saving of 0.05% or €60

 

[Zenith63]

Thanks for the responses guys, really helpful!

Can you help flesh out why you look at interest and not repayments though, asking for a friend who is struggling to get his head around it .

If the term is not going to change, then surely if I've got 348 out of 360 payments left to make, if I reduce my monthly payments by say €84 then the "saving" is just 348x€84=€29232? But in this case I'm just thinking about the next two years so it's two years worth of that same saving, or €2016? I thought this was the point of the constant period payment calcs they do.

Or is your thought process here that if you decided to pay off the mortgage early at some point in the future, then you'd have paid down more of the capital on the lower interest rate and see the saving then?

 

[Brendan Burgess]

Hi Zenith

It's quite hard to explain - so please do take our word for it.

If you want to study it, you will find the background here: A Guide to Mortgage Repayment Calculations.

As Red points out - after two years
1) You will have paid €2016 less in repayments, and,
2) Your balance will be €1,200 lower than it would otherwise have been.

So you will be €3,200 better off. Always look at the interest calculation and never at the repayments.

Brendan

 

[RedOnion]

Say your example of balance of 416k.
Assuming 20 year term.

At 2.99%, at the end of 2 years, remaining balance is 384,667
At 2.6% it would be 383,400

That's 1200 less that you don't have to repay in future. Ok, it's not a huge amount monthly, but it's a reduction in your balance.

You've saved over 3200 in 2 years, but see the benefit over 20 years.

 

[Fozzie]

Hi all,
first time poster here! I have a sum outstanding on my UB mortgage of €347500 fixed @ 2.6% with 26 months left paying €2740 per month on fixed period. I enquired about breaking as I wish to avail of new 2.2% rate. I was quoted a fee of €3126.27. I have the following questions to you learned ones..
1. Is this excessive?
2. I have the capacity to put €35000 (10%) against this sum before breaking and raising payments to €5000 per month. Is it worth taking the hit for the breakage fee and following this plan and how much would I save doing it?
3. How is breakage fee calculated?
This site is awesome, looking forward to any suggestions or insights

 

[RedOnion]

was quoted a fee of €3126.27

Quick answer.

Equates to 0.42% charge to save 0.4%.

however...

Pay 10% of balance. Break fee will reduce by 10%.
After you break, reduce term (to a level you can definitely afford) and then refix. You'll save significant money overall.

 

[Fozzie]

Thank you very much!

 

[_ripped_off]

I was quoted a fee of €3126.27.

Can I ask where on your correspondence from UB that figure was quoted?
I got a letter from them today after requesting the break fee on Friday.
There is no break fee quoted though just what my choice of new rates are.
So I’m wondering if my break fee is therefore zero as Red suggested in the other thread about internal switches with UB.
I’ve attached a snipped version of the letter I got today.

 

[RedOnion]

Can I ask where on your correspondence from UB that figure was quoted?
I got a letter from them today after requesting the break fee on Friday.
There is no break fee quoted though just what my choice of new rates are.
So I’m wondering if my break fee is therefore zero as Red suggested in the other thread about internal switches with UB.
I’ve attached a snipped version of the letter I got today.

And you thought AIB were bad?!!

That's a separate letter, setting out you new options. It's confusing because it tells you what the capped break will be in future.

You should receive a 2nd letter with the actual break fee on it.

The most confusing process I've ever seen!

Call them and ask what you're break fee is.

 

[_ripped_off]

That is indeed confusing as they include a rate change letter of authority, to be signed and returned within 10 days.
And they expect you to return that without knowing what the break fee is?
If they are worse than AIB not sure I could cope with ringing them! Won’t have time tomorrow might have plucked up the courage to do it on Friday!

 

[RedOnion]

@_ripped_off
I've heard several cases of people receiving the break fee after its out of date. I think once it's generated they can give you the details over phone.
Get the hubby to do it, just to wind him up!

 

[Twinkletoes078]

Hi guys, a quick question for you. We fixed with AIB last June for 5 years @ 2.85%, we have 19 years left on a 270k mortgage. Hubby just got a promotion & we’d love to cut our mortgage down to about 16 years (just so we’ll be late 50’s rather than in early 60’s finishing), I’m wondering is it even worth paying a breakout fee for this or should we just put the extra cash aside & wait the our term is finished & pay a little lump sum off the capital & then cut the years??? Thanks.

 

[RedOnion]

Hi @Twinkletoes078

I realise you're a new poster, so apologies if I haven't explained the below clearly.

It should be worth your while breaking even if not overpaying.

Your break fee would work out as about 0.2% per year for the remaining term. They've just reduced the rate by 0.3%, so if you refix you're immediately saving 0.1% per year.

Give the bank a shout and ask what the break fee is. You might need the cash up front for this (it'll be just less than 1% of your balance in your case if my calculations are right).

Now, if you shorten the term, you'll be contractually tied to that. If money is tighter than you thought, you won't be able to extend the term back out again. But it puts a discipline into it.

If you don't want to shorten the term contractually, then make regular overpayments when you can. They will calculate a break fee (if applicable) only on the amount of the overpayment. If you fix at the new rates for 5 years with AIB, they can only charge you a break fee if they further reduce their fixed rates (this is unique to AIB because of a clause in their T&C's).

 

[Twinkletoes078]

Hi @Twinkletoes078

I realise you're a new poster, so apologies if I haven't explained the below clearly.

It should be worth your while breaking even if not overpaying.

Your break fee would work out as about 0.2% per year for the remaining term. They've just reduced the rate by 0.3%, so if you refix you're immediately saving 0.1% per year.

Give the bank a shout and ask what the break fee is. You might need the cash up front for this (it'll be just less than 1% of your balance in your case if my calculations are right).

Now, if you shorten the term, you'll be contractually tied to that. If money is tighter than you thought, you won't be able to extend the term back out again. But it puts a discipline into it.

If you don't want to shorten the term contractually, then make regular overpayments when you can. They will calculate a break fee (if applicable) only on the amount of the overpayment. If you fix at the new rates for 5 years with AIB, they can only charge you a break fee if they further reduce their fixed rates (this is unique to AIB because of a clause in their T&C's).

Thanks so much for that informative response Red onion, I will contact the bank in the morning to see what the exact figures will be & I’ll chat to hubby to see what he thinks about overpayments instead of reducing the term. We were originally with ptsb with a variable of 4.2% & switched last year to AIB & reduced our terms down by 2 years on a variable rate & then we fixed on a lower rate and our monthly repayment came down again so we kinda want to put it to use that’s why hubby was adamant about reducing the term again.

 

[Eoghan]

Hi @Twinkletoes078

I realise you're a new poster, so apologies if I haven't explained the below clearly.

It should be worth your while breaking even if not overpaying.

Your break fee would work out as about 0.2% per year for the remaining term. They've just reduced the rate by 0.3%, so if you refix you're immediately saving 0.1% per year.

Give the bank a shout and ask what the break fee is. You might need the cash up front for this (it'll be just less than 1% of your balance in your case if my calculations are right).

Now, if you shorten the term, you'll be contractually tied to that. If money is tighter than you thought, you won't be able to extend the term back out again. But it puts a discipline into it.

If you don't want to shorten the term contractually, then make regular overpayments when you can. They will calculate a break fee (if applicable) only on the amount of the overpayment. If you fix at the new rates for 5 years with AIB, they can only charge you a break fee if they further reduce their fixed rates (this is unique to AIB because of a clause in their T&C's).

Hi red onion. I was thinking ,when I can switch, of getting a split mortgage of 40000 fixed and 35000 variable. Does this sound like a good idea Vs just fixing and making overpayments with a small penalty? I know you've said even overpaying beyond the 10% us still worth it.Im with ulstee at 2.3. Split would be 2.4(ithink) fixed and 3.1% variable if I stayed

 

[RedOnion]

@Eoghan
Which bank are you thinking of switching to?

 

[Eoghan]

@Eoghan
Which bank are you thinking of switching to?

@Eoghan
Which bank are you thinking of switching to?

KBC.