Key Post Should I pay a break fee to get a lower fixed rate?

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MsCutha

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I’ve been advised previously to switch but it seems like a lot of money upfront. I’m currently on maternity leave (main earner) and about to start unpaid leave so watching the pennies. We were overpaying by around 32% monthly but now back to 0 overpayment from this month.

My latest break fee from UB was 3580 sent earlier this month plus approx 1500 solicitors fee means I’ll be paying over 4K. But using Brendan’s calculation has got me thinking again.

Outstanding Balance 262,988
Current UB Interest rate 2.9
Fixed term remaining 23 months (sept 2023)
LTV 69%
Avant 7 year rate for <70 LTV is 2.15

So 0.75 (2.9-2.15) x 7 years = 5.25%
262,988 @ 5.25% = 13,806
Do my calculations look right? I’m tempted to raid my maternity funds if I’ll be saving 13k (less 4.5k).
 
I will use this case as an example about how to approach the problem.

Rule 1 - look at the interest saved. Do not look at repayments as they involve capital repayments as well. An option with higher capital repayments might look more expensive but higher capital repayments means you will owe less at the end.

Rule 2 - Calculate the savings for the remaining term of the existing fixed rate and not for the full term of the new fixed rate.

Using Cutha's figures

Mortgage balance: €263,000
Remaining term of existing fixed rate: 23 months
Difference in interest rates: .75% (2.9% existing rate - 2.15% new rate)

Interest saved = mortgage balance x difference in interest rates x remaining term on existing fixed rate

Interest saved = €263,000 x .75% x 23/12 ( 23 months over 12 months)

Interest saved = €3,780

Break fee: €3,580

So assuming interest rates remain the same over the next few years, it does not look like it's worth paying €3,580 up front to save €3,780

Rule 3 - If you decide not to switch, keep the decision under review
The factors may change quickly which would make a switch worthwhile.
  • The rates available from another lender may fall
  • The break fee will fall as the remaining term reduces
  • The break fee could fall if money market rates change
 
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Another way of looking at is to ask yourself how long will it take to recover the break fee?

The annual interest savings are: Amount of mortgage by difference in interest rate

So, in Cutha's case, the annual interest savings are

€263,000 x .75% (2.9% existing rate - 2.15% new rate)

= c. €2,000

The break fee is €3,580

So it will take nearly two years to recover the break fee.

As this is the remining time on the fixed rate, it's not worth it.
 
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Other issues to consider

The break fee may rise or fall

Market rates may rise or fall
The above is based on the assumption that interest rates won't change between now and when the fixed rate ends. So in September 2023, Cutha will be able to fix with Avant at 2.15%.

Interest rates may rise or fall. Cutha may like the security and predictability of a further 5 years at 2.15%. If so, then although there will be no saving over the next two years, she will know what she is paying for the following 5 years.

The LTV may rise or fall
Cutha is less than 70% LTV.

In two years, the LTV may have fallen below the 60% LTV rate which is really critical for getting the lowest mortgage rates.
The LTV could fall due to
  • house price rises
  • Ordinary capital repayments paying down the loan
  • Once off capital repayments designed to get it below 60%
Here are the 7 year rates for Avant
1635493086732.png


So it might be worth waiting to see if she qualifies for this lower rate of 1.95% .

Of course, house prices could fall, and the LTV might rise above 80%.
 
MsCutha said:
My latest break fee from UB was 3580 sent earlier this month plus approx 1500 solicitors fee means I’ll be paying over 4K. But using Brendan’s calculation has got me thinking again.
Click to expand...
In the long run you're better off switching to Avant. The question becomes when should you switch - now, in 23 months or somewhere in-between?

I'm assuming you will switch eventually so the solicitors fees and other costs associated with switching will need to be paid regardless i.e., it's a fixed cost regardless of option so I've excluded it from the analysis.

If you switch now you'll save €3,734 in interest expenses over the next 23 months. However, it will cost you €3,580 in break fees - you're net €150 better off switching now.

It's very touch and go and heavily dependent on movements in the break fee but you would be better off switching now rather than waiting 23 months.

The break fee could fluctuate and there may be more beneficial moments in the next 23 months to switch but it's an unknown. Speculating on market moments is crystal ball stuff.
 
The advantages of waiting

As your remaining term reduces, the break fee falls but you will be paying a higher rate in the mean-time.
Your loan to value may fall
Market rates may fall
You don't have to pay a break fee upfront.

The downsides and risks of waiting
Break fees are determined by money market rates and they may rise.
Market rates may rise.
 
Should you factor in the €1,500 cost of switching into the calculation?

If you are switching from KBC or Ulster Bank I think you should ignore the cost of switching.
Bank of Ireland and permanent tsb have very high rates for existing customers and so when your fixed rate ends you are going to have to switch anyway. So the cost should not be included in the calculation.

If you are switching from say Bank of Ireland to Avant, you should include the cost of switching.

And, of course, if you are just breaking the fixed rate with your lender, to refix with the same lender, then there will be no cost of switching.
 
Thanks @Brendan Burgess and @skrooge for explaining it so clearly. I’m also worried about PTSB taking over my mortgage so trying to wait until the right time to switch. I don’t think I will wait until the end of 23 months to switch, that will depend on interest rate and the speed of ptsb takeover. Of course nothing is certain but I’ve read interest rates could start to rise from next year or early 2023 but who knows. A lot of these financial talk go over my head, thanks so much for breaking it down for me. Much appreciated.
 
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