The equation for calculating breakage costs

I cannot make head nor tail of the equation for calculating breakage costs and I hope that someone who understands it better can confirm something for me.

My understanding is that while the variable rates are low, the breakage cost for us to get out of our 3 yr 5.4% fixed will be quite high (last quote from the bank was 11K). So it's not worth the outlay, especially given that the TRS would go down.

However, on another site, I was told to ring every day and ask for the breakage cost as it "changes in relation to the performance of the stock market". The poster seemed to be saying that if you rang on the right day, you could break out for little or nothing. But that doesn't make sense to me - the interest rates don't go up and down every single day so how can the breakage cost do so?

I would really appreciate if someone could explain.

Thanks a mill

Jo

There's an explanation of the formula used by Halifax in this thread. Most banks will use a similar formula.

It depends on the Bank. But most formulae seem to link the breakage charge to the difference between the rate you fixed at, and the prevailing fixed rate at the breakout date.

AIB calculate your breakout charge as the difference between the interest rate you fixed at and the interest rate on the breakout day, by the amount outstaning on your mortgage, by the length of time left of the fixed period.

Example:

Person takes out €500k mortgage on 1 Jan 2007 and fixes at 4.5% for three years.

Breakout June 2007

Assume three year fixed rate in June 2007 is 4.25%, breakout cost is €3,1.25. (.25% X €500k X 2.5 years).

Breakout December 2007

Assume three year fixed rate in December 2007 is 4.00 %, breakout cost is €6,250. (.5% X €500k X 2.5 years).


I have not taken into account the reducing balance of the amount outstanding as it will make little difference in the first 12 months.