Key Post It may be much cheaper than you think to break out of a fixed rate early...

Discussion in 'Mortgages and buying and selling homes' started by Brendan Burgess, Jul 24, 2017.

  1. podgemci

    podgemci Registered User

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    Hi Brendan,

    I finally got the breakage calculation from the bank! The following is how they explain it and break it down.

    The funding fee is calculated using the average balance of the loan over the period, the cost of the funds when the rate was fixed, the investment rate at date of breaking fixed rate and the number of days that were left of the fixed rate.

    Average balance = €218,423.07
    Original cost of funds at the date of fixing = 1.19%
    EURIBID (investment rate) at date of breaking fixed term = -0.328%
    Number of days remaining of fixed rate = 217

    The difference in the original costs of funds (1.19%) and investment rate (-0.328%) is 1.518%.

    The funding fee is calculated by;

    €218,423.07 x 1.518 / 36500 x 217 = €1.971.23

    I presume the highlighted part is the important part with regards to a low breakage fee??

    Thanks again for your help Brendan.
     
  2. RedOnion

    RedOnion Frequent Poster

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    This looks correct. Rates have fallen considerably since 2013.

    In your case you should still break and pay the fee (or capitalise it as the bank offered) and fix at lower rate. Effectively the bank is charging you 1.518% to reduce your rate by 2.29%, so you're still saving 0.772% interest (1000 EUR over the remaining term).
     
  3. Angelblue1978

    Angelblue1978 Registered User

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    3
    Hi

    I redeemed a loan with Haven last year and am now querying my redemption figures;

    I had initially borrowed €350,000 at 3.8% on a 5 year fixed rate from September 2015. I redeemed the mortgage in July 2017 (to move to a new lender) and paid a breakage cost of €3088.61. Can anyone advise me if this is a correct breakage cost to have paid, and also where can I access the cost of interbank lending rates for these periods.

    Many thanks.

    A
     
  4. RedOnion

    RedOnion Frequent Poster

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    3,088 over 38 months works out at c. 0.27% per annum.

    That looks about right as the difference between 5 year and 3 year rates for those dates.

    In the absence of Bloomberg access, I use the following as a proxy to swap rates, but it's not the same thing: https://www.theice.com/marketdata/reports/180
     
  5. Martin2018

    Martin2018 Registered User

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    Hi I am awaiting a breakage fee from aib. We fixed at 3.8% in june 2015 for 5 years. There is around €355,000 left on the mortgage. I think we borrowed €368,000. Any ideas on what I should be expecting? Have asked them to move to their variable rate which is 2.95%.
    Thanks
     
  6. RedOnion

    RedOnion Frequent Poster

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    Hi, somewhere around 4,800
    AIB have a different policy to all the other lenders. They base fee on the difference between your rate (3.8%) and their fixed rate for the remaining term (3.2%).

    It's still worth your while as you'll save the difference between the 3.2% and 2.95%
     
  7. Martin2018

    Martin2018 Registered User

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    oh lord! red onion thank you!
    we have been approved for a top up at 2.95% for €50k. They said that might go in our favour??

    Do aib not have to follow the EU directive? or is there a lender who will pay our breakage fee?
     
  8. RedOnion

    RedOnion Frequent Poster

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    They say they are following it. It's just their interpretation is different!
    There are lenders who would give you cash back if you switch to them. Eg BoI 2% cash back and fix at 3%. On your balance that would pay your legal fees & break fee.
    Of see if you are eligible for Ulster Bank 4 year rate at 2.6%. their cash back (1500) would cover legal fees only. If you wanted to fix longer term, KBC have a great 10 year rate, and they'll pay 3k to switchers so it'd cover your legal and about half the break fee.

    You should try negotiate with AIB though. At the worst they will let you add the break fee to the loan balance.
     
  9. Martin2018

    Martin2018 Registered User

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    red onion you are a fountain of knowledge. I will let you know what they come back with! Thanks again
     
  10. 005404

    005404 Registered User

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    Lender: Ulster Bank
    Rough value of property: €410k
    Total amount borrowed: €275,000
    Amount of mortgage balance outstanding: €246,500
    Date you fixed: September 2016
    Period for which you fixed: Until December 2019
    Fixed rate: 2.99%
    Term left: 22 Months at 2.99%

    I recently contacted Ulster Bank for a breakage fee to move to the 4 year 2.6% rate. The fee quoted to me for breakage was 6 months interest at Euro 3216.14. I was thinking based on what I have read that this seems very high. Could anyone verify my concerns. Thanks in advance.
     
  11. RedOnion

    RedOnion Frequent Poster

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    Did they provide a written quote?
    Back of an envelope calc - it should be around 600 mark. Maybe a little more.
     
  12. DMartin

    DMartin Registered User

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    Last edited: Mar 12, 2018
    I would like to start by saying well done to Askaboutmoney on providing great information to the public. There are interesting views here. To expand on the issue of mortgage break fees, I recently spoke to BOI on the subject. I am on a 3 year fixed rate. The formula for calculating them is on the mortgage documentation as follows:

    C = A x (R%-R1%) x D/365

    where:

    A= the amount repaid early (or the amount which is changed from the fixed rate to a new rate)
    R% = the annual percentage interest rate which was the cost to us of funding an amount equal to “A” for the originally intended fixed rate period.
    R1% = the annual percentage interest rate available to us for a deposit of an amount equal to “A” for a period equal to “D”
    D= the number of days from the date of early repayment (or rate change) to the end of the fixed period.


    All very straight forward - except that when I asked them over the phone how they calculate R% and R1%, their first response was that they don't give out that information. Then they said the break fee is zero in my case and because of that they could not tell me the answer to my question which is completely unsatisfactory. I still await an explanation of how the R values are calculated which they said they would post to me. I explained to them that if in the future, a break fee for leaving a fixed rate arrangement could be imposed on me by the bank, I feel that I should be entitled to know how this fee is calculated. The expressions for R% and R1% are vague and give no explanation on how they are calculated. From reading around I suspect they are related to the Euribor rates and if solely based on the Euribor rate I assume the break fee is zero because all the Euribor rates are the same now as when I took out the mortgage.

    Now, This is where you folk at Askaboutmoney may be able to shed more light on this for me.

    1. Am I right in my assumptions above about Euribor as the basis for the calculation?
    2. Does the same apply to other banks or can they lump other costs associated with funding the loan that they do not have to highlight the borrowers? KBC seem to take this approach.
    3. Could AIB be challenged on their interpretation based on the EU rules?

    I think It was Brendan Burgess himself who did lots of work on this and EU rules now prohibit a bank from charging a customer more in penalties for leaving a fixed rate loan arrangement early than it costs the bank. Redonion points out that: "The calculation is governed by the 'European Union (Consumer Mortgage Credit Agreements) Regulations 2016.

    And here is the sentence in this regulation that alludes to 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.

    If this is the case as set out legally, how can AIB interpret the legislation differently by using the difference between the rate the customer is paying and the rate they can charge for the remainder of the term to calculate break fees? Clearly this would not correlate to their cost of finance.

     
    Last edited: Mar 12, 2018
  13. 005404

    005404 Registered User

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    Hi thanks for reply. They sent me a reply with ll the different options available to me and the staggering fee of 3200 plus.what should be my next step.
     
  14. RedOnion

    RedOnion Frequent Poster

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    I'm very surprised. Ulster calculate the break fee on the difference between what they could get for deposit at the beginning (about -0.01%) and what they'd get now for remaining term (about -0.12%).
    Then they cap it at 6 months interest so it would never be more than that.

    Just question it - ask them if the break fee is calculated in accordance with their terms and conditions, and if they can provide you with the components of the calculation they provided to you.
     
  15. RedOnion

    RedOnion Frequent Poster

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    It's a fairly good approximation. BoI say the difference between what they can borrow at the start, and can get for deposit at the end. With their credit rating there's very little difference between borrowing and lending interbank and both would be very close to EURIBOR.

    PTSB very clearly state swap rates, which I think is a more true reflection of the cost to the bank.
    UB use deposit rates for both, so it eliminates any potential credit grade loading.
    KBC terms allow for other rate components, but since I first looked at this last year they have simplified the wording in customer brochures to be more aligned with BoI approach.

    Personally I think they should be.
    One of the weaknesses of the MCD is that it doesn't prescribe a single methodology for calculating break fee, so it's a little open to interpretation.
     
  16. DMartin

    DMartin Registered User

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    Thanks RedOnion
     
  17. Martin2018

    Martin2018 Registered User

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    Oh Lord I received my breakage fee....€7186.26!!!

    Loan balanace €353,816.21 interest rate 3.8% 5 year fixed. We took out mortgage in june 2015.
    Looking to move to 2.95% variable LTV>50%<=80%

    Rang aib asked for a breakdown on how they calculated it. They said they don’t send it and that the formula is on the letter!
    I asked about the new way calculating it and they said they were “unaware” of it.
    I asked them could they do anything on the breakage fee as we could move to KBC and they said no!
    Anyway I asked them to calculate early redemption fee as we will look now at moving. Basically the guy I was speaking to was extremelyunhelpful:(

    Any words of wisdom? We haven’t drawn down top up yet.
     
  18. DMartin

    DMartin Registered User

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    7

    So does their credit rating affect the banks cost of borrowing and could this in turn affect the break fees??. If so a banks credit rating would be important to the customer
     
  19. RedOnion

    RedOnion Frequent Poster

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    Technically, yes based in the rules used by some banks. So it's another question of whether CBI should be prescribing a single methodology and an externally available rate.
    One of the first cases we looked at last year was for Dilosk who had the same terms as BoI, but obviously had a much bigger impact because of the spread between their borrowing and deposit rates.
    One could argue the the credit risk is largely applicable even in the banks variable rates so shouldn't impact the break fee.
     
  20. TC2015

    TC2015 Registered User

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    Just off the phone and they told me that there is no charge for breaking out of an 'introductory fixed rate'. I took out a 3-year fixed new business mortgage with them last May, 2017.

    Waiting for written confirmation though.