### Key Post - Understanding Fixed Rates breakage costs

Understanding Fixed Rate breakage costs (Updated May 2019) Summary The manner in which lenders calculate their breakage costs is set down under new legislation introduced in 2016. The interest rates charged by the lender to their customers are not relevant. As of now, May 2019, the rates at...

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AIB's calculation method:

*"We calculate the early repayment charge using the following formula: (A) X (U) X (D %) = € ERC [early repayment charge], where:*

(A): Amount of your mortgage loan being repaid early, or converted to another interest rate.

(U): Number of months remaining before the fixed interest rate is due to expire, divided by 12.

(D%): Difference between your original fixed interest rate at the start of the fixed interest rate term, for the full fixed interest rate term, and the applicable fixed interest rate offered by the Bank at the time the mortgage loan is repaid or converted, for the period of (U)

We will also use a market interest rate to calculate the D% component in the formula above."

(A): Amount of your mortgage loan being repaid early, or converted to another interest rate.

(U): Number of months remaining before the fixed interest rate is due to expire, divided by 12.

(D%): Difference between your original fixed interest rate at the start of the fixed interest rate term, for the full fixed interest rate term, and the applicable fixed interest rate offered by the Bank at the time the mortgage loan is repaid or converted, for the period of (U)

We will also use a market interest rate to calculate the D% component in the formula above."

My question specifically relates to the AIB Green 5 year (2.25%, LTV 50%) and and how they calculate the ERC. Having read the excellent post by @RedOnion on breakage costs above, it appears that there is a very good chance over the 5 year period that no early repayment charge will be applicable. The 2 methods AIB use for calculating the ERC are based on a) their fixed customer rates or b) the wholesale market rates. The cheaper of the two is used for the customer.

At the moment, all of AIB's 1-4 year fixed rates are higher than the 5 year rate so if after 12 months, we wanted to overpay or break completely, the D% would be negative and hence no break fee, i.e. 2.25%(5yr) - 2.65% (4yr) = -0.4%

So is the following correct: If:

- Wholesale rates drop, then the higher customer rates (currently) on the shorter fixed terms will be used to calculate a break fee of zero
- Wholesale rates rise, then the wholesale rates will be used to calculate a break fee of zero
- Customer rates and wholesale rates drop, then a break fee is likely to apply but customer should have some foresight of this and can break before a fee applies.

But in the event that fixed rate competition drives rates to drop even further, there is a good chance of breaking out of the 5year green without any ERC