Key Post Is there any downside to fixing your rate for a longish term at present?

[gargoil7]

Thanks for the correction.

I think I must have used the wrong interest rate in the calculation.

I have revised the original figure - it comes out at €2,791

No worries Brendan & thanks for the help, highly appreciated (by the way your energy, input & value-add to AAM probably rarely gets the recognition it deserves so thank you!).

So it's clear. Fix for 10 years.

Brendan

Yes, the 10 yr fix is tempting value-wise & for hedging against rate increase risk for the last 3 years, however in our case switching from a 2.2% fixed 2.1% just doesn't 'feel' like that much of a saving, especially after solicitor fees & time/energy invested into the switch, as compared to 1.95%, the best rate on the market. Plus €2791 in interest savings over 7 years can't be sniffed at.

If the scenario was that we could make an overpayment of at least €3k per year, do you think this would make the case to choose the 7yr 1.95% fix instead of 10yr 2.1%? Eg would these overpayments every year for the next 7 years offset the risk of rates being as high as 3.1% in years 8, 9 & 10? Hopefully this makes sense. I'm trying to build a case for choosing the 1.95% or see under which scenarios it makes most sense (bar trading up which we don't currently have plans for).

 

[_OkGo_]

If the scenario was that we could make an overpayment of at least €3k per year, do you think this would make the case to choose the 7yr 1.95% fix instead of 10yr 2.1%? Eg would these overpayments every year for the next 7 years offset the risk of rates being as high as 3.1% in years 8, 9 & 10? Hopefully this makes sense. I'm trying to build a case for choosing the 1.95% or see under which scenarios it makes most sense (bar trading up which we don't currently have plans for)

Your ability to overpay doesn't really change the decision. The outstanding balance in both scenarios is approximately €20k lower so you will save an additional €1100/1200 in interest either way but the difference between 1.95% & 2.1% is still ~€2700. So over the final 3 years, it is still €900/200k saved per year or 0.45% buffer that you would have against rate increases. Anything over 2.55% at year 7 and you can be comfortable that you made the right choice.

But what I think is more important in your situation where your capacity to overpay may be limited is minimizing your monthly repayment. Your current figures of €295k over 23 years at 1.95% will give a mortgage payment of €1327 or approximately €16k per year. You feel you can overpay by €3k so in total you would be comfortable with €19k per year going towards your mortgage.

If you make this overpayment for each of the 7 years, make sure that it reduces the balance and not the term. At year 8, your monthly commitment will reduce to €1215. You can still top this up with an annual overpay of €4.5k. You are still making a total payment of €19k per year but you are buying flexibility by reducing the monthly commitment.

If it is at all possible, you should try to build this flexibility into your loan offer. If you can get a longer term than 23 years then you should take it but be consistent about maintaining overpayments. For example, if you stretched to 27 years, your monthly payment drops to €1170. You can top this up with a €5k overpayment to bring your total to €19k. You end up in the same position but you have more control over your finances.

In my opinion this is a more important 'insurance policy' in your position vs the debate over 7vs10yr or 1.95 vs 2.1%

You can play around with all the options comparing reducing term vs reducing payment using a mortgage calculator.

Karl's Mortgage Calculator

Mortgage calculator with graphs, amortization tables, overpayments and PMI

www.drcalculator.com

 

[gargoil7]

Your ability to overpay doesn't really change the decision. The outstanding balance in both scenarios is approximately €20k lower so you will save an additional €1100/1200 in interest either way but the difference between 1.95% & 2.1% is still ~€2700. So over the final 3 years, it is still €900/200k saved per year or 0.45% buffer that you would have against rate increases. Anything over 2.55% at year 7 and you can be comfortable that you made the right choice.

Makes sense, thanks _OkGo_

But what I think is more important in your situation where your capacity to overpay may be limited is minimizing your monthly repayment.

Not negating the advice, but assuming the prequisite of monthly repayment affordability is met from a budgeting/cashflow perspective, my understanding from advice to other posters on other AAM threads was that the priority should be not to focus on minimizing the monthly repayment but instead to focus on minimising the total interest charge, i.e. to ensure that whatever monthly you have that the interest portion is minimised & inversely the principal portion is maximised. Balance aside, the rate & term determines how much goes towards principal vs interest payment. As such our approach to date has been to minimise the rate & the term - the latter within reason - so as to chip away at the principal as efficiently as possible.

Your current figures of €295k over 23 years at 1.95% will give a mortgage payment of €1327 or approximately €16k per year. You feel you can overpay by €3k so in total you would be comfortable with €19k per year going towards your mortgage.

If you make this overpayment for each of the 7 years, make sure that it reduces the balance and not the term.

Thanks & I note the same advice in this key post.

At year 8, your monthly commitment will reduce to €1215. You can still top this up with an annual overpay of €4.5k. You are still making a total payment of €19k per year but you are buying flexibility by reducing the monthly commitment.

Good advice from a future cashflow perspective.

If it is at all possible, you should try to build this flexibility into your loan offer. If you can get a longer term than 23 years then you should take it but be consistent about maintaining overpayments. For example, if you stretched to 27 years, your monthly payment drops to €1170. You can top this up with a €5k overpayment to bring your total to €19k. You end up in the same position but you have more control over your finances.

Right, however for this switch we currently intend to reduce the term from it's current remaining term balance of 23yrs 8 months to 23 years, rather than increase it slightly to 24 years for the reason being that although 23yr term means a slightly higher monthly payment, the total cost of credit is lower, i.e. the monthly payment consists of a smaller interest portion than a 24yr term & therefore more off the principal each month. Also a 24yr or higher term would push the mortgage end date beyond the current state retirement age for us, which isn't a huge deal but we'd prefer to be mortgage free by then (notwithstanding that overpayments between now, if possible, would effectively result in paying off the mortgage sooner than the contracted term anyway).

In my opinion this is a more important 'insurance policy' in your position vs the debate over 7vs10yr or 1.95 vs 2.1%

You can play around with all the options comparing reducing term vs reducing payment using a mortgage calculator.

Karl's Mortgage Calculator

Mortgage calculator with graphs, amortization tables, overpayments and PMI

www.drcalculator.com

Thanks, yes Karls Mortgage Calculator is very handy.

 

[_OkGo_]

my understanding from advice to other posters on other AAM threads was that the priority should be not to focus on minimizing the monthly repayment

Sorry, maybe I can clarify what I mean is to reduce your contractual monthly repayment. In my example above, you are comfortable paying €19k per year towards your mortgage. If you can keep that level of repayment up, you would clear your mortgage in 18-19 years. So then the question becomes: Do you want to be contractually obliged to pay €19k per year or be obliged to pay €15k with an optional €4k overpayment? Your mortgage reduces at the same rate but you have the freedom to reduce your overpayments if your financial circumstances change.

Balance aside, the rate & term determines how much goes towards principal vs interest payment.

No, the only thing that really matters is the balance and interest rate. All overpayments will reduce the balance in the very same way that a shorter term will. You just need to have a little diligence to make sure that the overpayments are made every year.

The trap that a lot of people fall in to is that they take the longest available term with an intention to overpay but they just don't do it. The overpayment gets eaten up by lifestyle and in that scenario, a longer term is a bad idea.

Also a 24yr or higher term would push the mortgage end date beyond the current state retirement age for us

Ok in this case you probably don't have much room to change the term but everything else above still applies. Use your overpayments to reduce the monthly contractual payment and maintain the term. If nothing major (financially) happens and you maintain the overpayments, you'll be comfortably mortgage free in your early 60's

Going back to your original query of 7yr(1.95%) vs10yr(2.1%), I would personally go with the 7 year and guarantee that saving of €2.8k for the next 7 years. For years 8-10, anything below 2.55% is still better than the 10 year rate. Anything from 2.55-3% is only slightly worse off. And eventually at year 10, your are still open to whatever rates are available.

The protection that you are 'buying' with the 10 year rate is only for that 3 year period. And it is likely that during the 7 year period, you can break/switch to lock in a longer term if there are signs of increased rates in the future. You just need to keep reviewing your mortgage every year

 

[gargoil7]

Sorry, maybe I can clarify what I mean is to reduce your contractual monthly repayment. In my example above, you are comfortable paying €19k per year towards your mortgage. If you can keep that level of repayment up, you would clear your mortgage in 18-19 years. So then the question becomes: Do you want to be contractually obliged to pay €19k per year or be obliged to pay €15k with an optional €4k overpayment? Your mortgage reduces at the same rate but you have the freedom to reduce your overpayments if your financial circumstances change.

Got it, thanks.

No, the only thing that really matters is the balance and interest rate. All overpayments will reduce the balance in the very same way that a shorter term will. You just need to have a little diligence to make sure that the overpayments are made every year.

That's the thing. Note to self to make those overpayments. With other banks it's somewhat easier to make monthly overpayments but Avant apparently only allows a single overpayment per year. It's by & large the same thing of course (particularly if you make the single overpayment as early as possible in the year) but less 'automated' (no direct debit) so requires that little bit more discipline to conciously schedule & follow through on that single overpayment. Hopefully Avant offer monthly overpayments at some point in future.

The trap that a lot of people fall in to is that they take the longest available term with an intention to overpay but they just don't do it. The overpayment gets eaten up by lifestyle and in that scenario, a longer term is a bad idea.

Exactly, it's even more of a trap with a joint mortgage (takes 2 to make it happen rather than 1), but I guess a workaround to help stick to the plan is to have a monthly saving from each going into a joint saving account & make the single overpayment from that joint account at the end of the year.

Ok in this case you probably don't have much room to change the term but everything else above still applies. Use your overpayments to reduce the monthly contractual payment and maintain the term. If nothing major (financially) happens and you maintain the overpayments, you'll be comfortably mortgage free in your early 60's

There's some room, we can get approval for 24 yrs for sure & don't have to go for 23 yrs, it's just the longer the term the higher the chance of well intended yearly overpayments not being made in single or multiple years (the lifestyle trap above). I know it's only 1 year but 23yrs somehow feels like the prudent term to take (can extend it during our next remortgage/switch when the time comes).

Going back to your original query of 7yr(1.95%) vs10yr(2.1%), I would personally go with the 7 year and guarantee that saving of €2.8k for the next 7 years. For years 8-10, anything below 2.55% is still better than the 10 year rate. Anything from 2.55-3% is only slightly worse off. And eventually at year 10, your are still open to whatever rates are available.

Thanks, you've helped me make the case for the 7yrs. I saw the protection (rate increase risk mitigation) in the 10yrs but I just couldn't look past the 'value' in comparison of the 7yrs. This breakdown has helped me see through the woods.

The protection that you are 'buying' with the 10 year rate is only for that 3 year period. And it is likely that during the 7 year period, you can break/switch to lock in a longer term if there are signs of increased rates in the future. You just need to keep reviewing your mortgage every year

Absolutely. Thanks again!

 

[cremeegg]

Thanks, so choosing the 7 yr term over the 10 yr term a gamble on whether or not mortgage rates will be higher than 2.5% in 7 years time, something obviously nobody can foresee.

There is a lot of overthinking going on here. In 10 years the OP will still have a substantial mortgage.

The choice is to fix between year 7 and year 10 or not. He can fix now at 2.? %.

In 7 years interest rates may be lower than that but only a little lower. They may be substantially higher. Long term fixes at these low rates are a steal.

I hope to live to come back here to say so when the banks are trying to unfix people on 2% when variable rates are 6%, or 16%

 

[Gordon Gekko]

I hope to live to come back here to say so when the banks are trying to unfix people on 2% when variable rates are 6%, or 16%

Why?!

If interest rates are that high, we’ll have bigger problems.

My own sense is to take the best rate for the longest term possible, e.g. 1.95% for 7 years.

There is still downward pressure on rates here in Ireland; yes, rates may increase at a European level but there’s still more to go on the competition side of things here.

If 41% of people are dealing with brokers and going to the “new” entrants, the banks will have to respond.

 

[Marco 1972]

Hi

Was going to inquire whether to fix as have 14 yrs left of 30 yr mortgage, paying 3.150 AIB variable, but LTV is below 50% at this stage so could avail of a lower rate over 3 to 5 year period and peace of mind, unlikely to trade up at this stage,,

but what does the unfolding Ukraine situation means for inflation, cost of living etc as hearing we will 'all have to share pain' does that imply economies contracting or opposite, banks gouging customers and hiking rates very suddenly....

 

[Paul F]

Hi

Was going to inquire whether to fix as have 14 yrs left of 30 yr mortgage, paying 3.150 AIB variable, but LTV is below 50% at this stage so could avail of a lower rate over 3 to 5 year period and peace of mind, unlikely to trade up at this stage,,

but what does the unfolding Ukraine situation means for inflation, cost of living etc as hearing we will 'all have to share pain' does that imply economies contracting or opposite, banks gouging customers and hiking rates very suddenly....

@Marco 1972 What is your outstanding balance? And what is your BER?

 

[Marco 1972]

127,000 and C1

 

[Paul F]

@Marco 1972 You can switch to Avant's 1.95% rate and fix for up to 7 years.

Or go for Avant's 10-year fixed rate at 2.1% if you prefer a longer period of certainty of your interest rate.

AIB's 5-year fixed rate of 2.35% has the advantage that it's very easy to switch to – just a few forms and no solicitor needed. If you go for that, you'll save pretty much exactly the same over the next 5 years as if you had gone for Avant's 10-year 2.1% rate (when accounting for fees for switching to Avant). But nobody knows where interest rates will be in 5 years (when the AIB fixed rate ends).

 

[Marco 1972]

Cheers , thanks for that,, will have a think, tending towards AIB for convenience etc...

 

[Protocol]

In general, I can't see any downside to fixing at 1.95% - 2.50% for 5-7-even 10 years now.

I can't see much further cuts in fixed rates in Ireland, due to lack of competition as banks exit the market, and the underlying issue with size of capital to be held against loan books.