# Overpayment flexibility of AIB's 5yr Fixed Rate

#### _OkGo_

##### Registered User
We are in the process of switching and are looking at 3,4,5 year fixed rates. KBC, Avant, AIB and UB all have rates between 1.95-2.35% and when broker fees (a number of Avant brokers seem to charge a fee) and cashback (UB €1.5k, KBC €3k, AIB 2k) are accounted for, they are all very similar 'value' over the fixed term.

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."

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.
As far as I can see, this really only works for the 5 year green rate because it is the lowest rate on offer, it would not work for the 4, 7 or 10yr rates. And it should also be said that UB offer a pretty good overpayment option of 10% of the balance per year and KBC allow 10% of the balance over the term.

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

#### RedOnion

##### can edit posts
@_OkGo_
I had to read it twice, but what you've posted above is exactly my understanding. Effectively you can overpay / switch to your heart's content until such time as AIB drop their shorter term fixed rates below the 5 year rate.

Factor in the impact of free banking also in your decision, particularly if it's not a huge mortgage.

when broker fees (a number of Avant brokers seem to charge a fee)
Are you sure you've understood this correctly? My understanding is that Avant are paying all of their brokers 1% commission on drawdown. There might be a fee being sought by some brokers, which is refunded on drawdown?

#### _OkGo_

##### Registered User
Factor in the impact of free banking also in your decision, particularly if it's not a huge mortgage

Yes I had thought of that but forgot to include it. We already bank with AIB so this would be an advantage. Plus KBC's best rates require a current account and salaries paid into said account. Not overly complicated but just a little extra hassle

Are you sure you've understood this correctly? My understanding is that Avant are paying all of their brokers 1% commission on drawdown. There might be a fee being sought by some brokers, which is refunded on drawdown

I have not gone through all of them but there are 1 or 2 that seem to charge a non-refundable fee that is only waived if you buy another product ( eg insurance) with the broker. Or some appear to have some clawback clauses that can be triggered by overpayment or early redemption of the mortgage. It is certainly not the case with all of them but it is worth reading the fine print with each broker before engaging with them to avoid any surprises.

I had not previously seen Brendan's thread but yes it is the same as my own logic. So effectively the green 5 year is combining the best of both fixed and variable mortgages. The benefit of fixed rates (low interest rate & certainty) and variable rates (no ERC's & overpayment option) at least until such time as AIB reduce their short term fixed rates.

#### Tickle

##### Registered User
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.

Caveat Emptor. You may want to calculate, by way of example, some breakage fees today based on fixing (for various terms) at the time the post was written.

#### RedOnion

##### can edit posts
Or some appear to have some clawback clauses that can be triggered
Yes, Avant seem to be more strict on the claw back than some of the other lenders have been.
"* Avant Money clawback commission over 36 months on a pro-rata, month by month basis (36/36ths) i.e. if the loan redeems after 15 months, clawback will be 21/36 of commission"

#### _OkGo_

##### Registered User
Caveat Emptor. You may want to calculate, by way of example, some breakage fees today based on fixing (for various terms) at the time the post was written.

I don't follow, it is not about fixing for different terms today, it is fixing for 5 years only at 2.25%. If breaking or overpaying at anytime during the term, AIB's calculation will use the nearest fixed rate that they offer. As in my original post, all of AIB'S 1,2,3&4 year rates are currently higher than the 5 year so there is a good chance (not guaranteed) that the difference D% will be negative resulting in a zero break fee. Or there would likely be a press release announcing impending rate reductions which would allow you to break before a fee would be incurred.

It is not a feature of the product like UB's overpayment facility, it is more of an anomaly of the fixed rate pricing being higher in the short term and AIB's ERC calculation methods. Basically it is much better to fix for five years with AIB than it is for shorter or longer terms where you are more likely to incur a break fee

#### RedOnion

##### can edit posts
Caveat Emptor. You may want to calculate, by way of example, some breakage fees today based on fixing (for various terms) at the time the post was written.
It's a valid point re Break Fees in general, and how markets have changed from when the original post as written, but the specific aspect that @_OkGo_ is asking in relation to AIB is a contractual one, which is unique to AIB.

#### pablo57

##### Registered User
I've had to read this thread (and a separate one!) about 3 times to get my head around the formula and what it means. Thanks so much @_OkGo_ for pointing out this additional quirk to the AIB calculations (and @RedOnion for your other postings on this front). As a fixed rate, I had only been considering the bonus of no breakage fee in terms of getting the better interest rate, without really thinking about the overpayment possibility. I feel like this Green mortgage has opened up an unusual situation and (presumably) unintentionally provided a lot of flexibility to people who are able to avail of it.

#### RedOnion

##### can edit posts
this Green mortgage has opened up an unusual situation and (presumably) unintentionally provided a lot of flexibility to people who are able to avail of it.
It's not just the Green rate. AIB have completely messed up their mortgage pricing, and obviously don't understand their own terms & conditions. This flexibility is potentially available on most of their rates.

I'm happy to point this out to people as AIB spent over a year telling myself & @Brendan Burgess we were incorrect until we helped a few people bring cases to the FSPO and AIB changed their contracts.

#### malcom

##### Registered User
I've an AIB variable rate mortgage, currently 2.75%, The balance is approximately 80K, with 20 years left. I'm overpaying each month and, unless circumstances change, I should have it paid off in three years or a bit less. (I'm maxing pension contributions and reducing mortgage seems best use of my savings).

Given that most of what I pay in next three years will be the overpayment part, I'm wondering what overpayment charges would be if I switched to the 2.35% 3 year fixed rate. I don't want to reduce mortgage term from 20 years, as I like having the minimum monthly payment as low as possible. I'm not sure I understand D in the AxUxD equation. Is D today the difference between this rate 2.35 and the lowest rate 2.1 (5 year green, which my house would not qualify for)? Is there a likelihood I could end up having significant overpayment charge in the next three years that would outweigh the benefits of switching to fixed?

#### _OkGo_

##### Registered User
I'm not sure I understand D in the AxUxD equation. Is D today the difference between this rate 2.35 and the lowest rate 2.1 (5 year green, which my house would not qualify for)? Is there a likelihood I could end up having significant overpayment charge in the next three years that would outweigh the benefits of switching to fixed?
No, the D is the difference between your rate and the rate applicable to you at the time of overpayment.

For example, if you fix today at 2.35% for 3 years, then in 12 months, you'll have 2 years remaining on your fixed term so you will be compared to the 2 yr fixed rate at that time.

Similarly in 24 months, you have 1 year remaining so your rate is compared against the 1 year rate at that time.

AIB's 1 and 2 year fixed rates are currently at 2.95% so these would need to drop below 2.35% before you would risk incurring an early repayment charge.

#### malcom

##### Registered User
Thanks for clarifying this, @_OkGo_ .

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##### Registered User
On the mechanics over overpaying while on an AIB fixed rate....is it necessary to request a break fee from them (which will be zero), then give instruction to break out of it, then make the overpayment, and then refix??

Or can I just go ahead and make a lump
sum payment into the mortgage account? AIB will check whether fees need to be charged, but will find they won’t?

Im on the <80% LTV 3yr fixed since last October. Rates have not changed since then

#### _OkGo_

##### Registered User
Or can I just go ahead and make a lump sum payment into the mortgage account?
Have a look at the Mortgage overpayment options here. It's not completely clear but I think if you make the lumpsum payment online then the default action is to reduce the term. Might be worth checking this with AIB directly

So it is probably best to use the overpayment form and choose option A just to be on the safe side.

AIB will check whether fees need to be charged, but will find they won’t?
That's what I assume so as long as you are happy that you have calculated your own break fee correctly as zero then you shouldn't have a problem