Mortgage options

[Kevin198823]

Hi,

I recently went sale agreed and I'm about to submit my application for a loan offer, the mortgage amount will be €535k. I have 2 options.

1. 4 year fixed rate at 3.7% which will give me repayments of €2,463 per month with no cash back

or

2. 2 year fixed rate at 4.4% which will give me repayment of €2,679 per month with 2% cashback (€10,700)


My thinking is if we taken option 2 that will cost us an additional €5,184 over 2 years for €10,000 up front. In two years when interest rates fall I should be able to change to a different interest rate. Am I missing something here or is option 2 the best option?

Thanks in advance

 

[noelÓm]

In present circumstances, I would pick option 2.

It sounds like you don't have any other pressing need for cash, so consider using the €10,700 cashback as a lump sum payment on your mortgage. The break fee is likely to be zero or close to it because very little time will have passed since drawdown. This will save you roughly another €470 per annum for two years. So, your €10,700 figure for the purposes of comparing options 1 and 2 should be closer to 10,700+940=€11,640.

I think the extra interest paid in Option 2 over the two years is closer to ((0.044-0.037)*535000*2)=€7,500, rather than €5,184. But my sums might be out.

To pick Option 1, you either need to be unusually pessimistic about where interest rates will be in 2 years' time or really value the extra certainty in years 3 and 4. Would you pay (11,640-7,500)=€4,140 to be sure? If not, take Option 2.

 

[Kevin198823]

In present circumstances, I would pick option 2.

It sounds like you don't have any other pressing need for cash, so consider using the €10,700 cashback as a lump sum payment on your mortgage. The break fee is likely to be zero or close to it because very little time will have passed since drawdown. This will save you roughly another €470 per annum for two years. So, your €10,700 figure for the purposes of comparing options 1 and 2 should be closer to 10,700+940=€11,640.

I think the extra interest paid in Option 2 over the two years is closer to ((0.044-0.037)*535000*2)=€7,500, rather than €5,184. But my sums might be out.

To pick Option 1, you either need to be unusually pessimistic about where interest rates will be in 2 years' time or really value the extra certainty in years 3 and 4. Would you pay (11,640-7,500)=€4,140 to be sure? If not, take Option 2.

Thanks for the reply.

We are actually going to use the €10,000 to do a small bit of renovation work on the.

 

[Bronte]

My thinking is if we taken option 2 that will cost us an additional €5,184 over 2 years for €10,000 up front. In two years when interest rates fall I should be able to change to a different interest rate. Am I missing something here or is option 2 the best option?

I have no crystal ball that tells me interest rates are going to drop in 2 years. Personally I don't like banks gimmicks such as 'cashback'. Especially if there is a whole heap of terms and conditions to fall foul of. Also would prefer the lower interest rate fixed over the 4 years. Those cashbacks aren't free by the way. The cost must clearly be built in somewhere, probably in higher rates for others. Generally the existing mortgage holders.

What is your age, income, mortgage term, purchase price.

Are you getting the best value mortgage that suits your budget. Why is their only 2 options? Are you with a broker or dealing directly with one bank.