Key Post Understanding Fixed Rates breakage costs

Discussion in 'Mortgages and buying and selling homes' started by RedOnion, 22 Jul 2017.

  1. sojourn2015

    sojourn2015 Registered User

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    I think minus interest and arrears and penalties it would have been 416,000.00. Interest and arrears were 120,000.00
     
  2. sojourn2015

    sojourn2015 Registered User

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    I wrote 5 times to EBS requesting a proper decipherable breakdown, they just kept sending me the standard EBS BFRP formula. The final reply letter from them says . There is nothing we can do about this unwinding fee as it is charged directly to EBS, and we in turn pass this fee exactly as it is, onto our members. I never requested the FRP (Breaking Fixed-rate-penalty formula), I requested a breakdown of how I got charged 27,000.00 for breaking the FRT (Fixed -rate term ) in layman's terms!
     
  3. RedOnion

    RedOnion Frequent Poster

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    That suggests a difference of 4.3% between 10 year rate at beginning and 18 months rate at end.
    It looks about right. You fixed at the height of the crisis when rates were high (AAA bonds were about 4.5%), and broke when interbank rates were negative.
     
  4. sojourn2015

    sojourn2015 Registered User

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    Thanks RedOnion. Even if it was at the height of the crisis, it was a boom time rate, and they could have given us a bit of a break as we
    co-operated fully when selling the house. We were never warned when fixing that the penalty would be so outrageously high.
     
  5. RedOnion

    RedOnion Frequent Poster

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    Unfortunately the notice required is dictated by central bank, and is along with lots of other regulatory notices. I would argue that it could be explained better, particularly by using your actual balance rather than a generic one, and maybe with a best / worst case scenario.
     
  6. sojourn2015

    sojourn2015 Registered User

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    Yes, totally agree with you RedOnion, generic formulas for fixed rate breakage fees should be done away with and simplified for all to understand, if the unforeseen happens later in a long term fixed mortgage.
     
  7. ThatNewGuy

    ThatNewGuy Registered User

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    Hi, what's the best source to view the interbank lending rate? Tradingeconomics says it's -0.33%. Is that correct? Currently deciding between 1yr and 3yr fixed, and if going 3yr would like to know what I'm pegging myself against for a break if I decided to do it
     
  8. dexterdempsey

    dexterdempsey New Member

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    Hi

    I fixed with BOI in Sep 2015 for 5 years @ 3.95% and am currently moving to PTSB. They sent with out a breakage calculation in March with a Euribid of -0.04% , original cost of funds they have as 0.28% and a fee of just under €2k.
    I received redemption figures today and the break fee is €2600 nearly. I would of thought it would be less as the days remaining has come down , the amount outstanding has come down and I wouldn't of thought the Euribid would of changed too much

    Does this seem right or is there anywhere I see the actual Euribid/interbank
     
  9. RedOnion

    RedOnion Frequent Poster

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    @dexterdempsey
    Interbank rates have dropped a bit since March, but I wouldn't have thought that much. You will have moved from 2.5 year rate to 2 year rate though.

    I don't have access to live deposit data, but a 0.1% drop would be enough to make that change. 2 year swap rate is -0.14% so it looks about right. What's your balance?
     
  10. dexterdempsey

    dexterdempsey New Member

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    Just over €250k
     
  11. RedOnion

    RedOnion Frequent Poster

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    250k*(.28%+.14%)*2 = 2100
    Interbank rate would need to be -0.24% to come to 2,600. It could be that low for interbank: AAA bond rate is under -0.5% at the moment.
     
  12. Sean A

    Sean A Registered User

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    Hi

    I fixed my mortgage with Haven in 2010 at 4.85 percent on a fee of around 245k.
    The fix rate will end in march 2020 I was qoated a breakage fee of 10380.
    I asked them for a method in which they calculated this figure and they replied with the following .

    (A) amount – The amount being repaid early or the amount being converted to a variable rate or another fixed rate term.
    original cost of funds – The cost of funds for Haven for the fixed rate period at the time the fixed rate period commenced.

    cost of funds for the fixed rate period remaining – Fixed rate period. The cost of funds used will be as of 5pm the day previous to the request to calculate the early redemption charge.

    (U) remaining term in days – Remaining number of days left before the fixed rate is due to expire, divided by 365.

    (D) difference in cost of funds – The difference between the original cost of funds and the cost of funds for the fixed rate period.

    Worked Example:
    ssume a 5 year fixed rate loan. Full repayment of €100,000 after 3 years (A); remaining term 2 (U); difference in cost of funds 2% (D). The early redemption charge would be as follows: (A) 100,000 * (U) 2 * (D) 2% = €4,000.

    Can anybody assist and give me a steer and tell me if the breaker fee is correct
     
  13. RedOnion

    RedOnion Frequent Poster

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    Hi @Sean A
    What's your remaining balance?
     
  14. Sean A

    Sean A Registered User

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    222k Red Onion
     
  15. RedOnion

    RedOnion Frequent Poster

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    Hi @Sean A
    Looks right, or even a bit low.
    'D' is about 3.11% based on that break fee (10,380/1.5years/222k)

    The interbank rate at the moment for 18 month funds is negative (-.2). I don't have 10 year rates from March 2010, but Irish government debt was yielding over 4%.
     
  16. Sean A

    Sean A Registered User

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    Thanks Red Onion.

    So 222000 * 1.5 * 3.11= 9990 roughly . Which kinda of tally's with the figure I received.

    Would this calculation comply with the 2016 legislation for example do it use the interbank rate to calculate the breakage fee rather than the prepayment penalty method(money they would loose until the end of term if not getting the higher rate) used by banks pre 2016...

    Cheers
     
  17. Brendan Burgess

    Brendan Burgess Founder

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    So it's not worth breaking and switching to another lender.

    For example, you could go to Ulster Bank at 2.3% and save yourself €220k @2.55% x18/12 = €8,400 - not worth it.

    Red, it seems like a very high break fee. I thought that in most cases it worked out that breaking was the right thing to do, even if the break fee was high. But there seems to be sets of circumstances, where it's not worth doing.

    Brendan
     
  18. Sean A

    Sean A Registered User

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    Hi Brendan.

    Thanks for the input.

    Considering that I'd have to pay the 8400 plus fees for switching etc it mighten be worth the Hassel. On top of that we have a pyrite issue which may hinder switching.

    We might just sit tight unless I am missing something major here in which case please let me know.

    Cheers
     
  19. RedOnion

    RedOnion Frequent Poster

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    Yes, it appears they are correctly using interbank rates.
    Strangely, the way AIB calculate, which I believe is in breech of legislation, would result in a lower break fee.

    Yes. A lot of the discussion we've had has been around customers who fixed when we were low on the interest rate curve, and drops in mortgage rates reflect tighter margins rather than reduced cost of funds.
    I forgot about long term rates from pre 2013, when cost of funds were up to and above 4%.
    It comes down to the 'margin' the banks are charging. A fixed rate of 4.85% in March 2010 was a margin of less than 1%. Because the margin now on 2 year rates is higher than that, it's not worth breaking.
     
  20. Brendan Burgess

    Brendan Burgess Founder

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    Hi Red

    Yes, AIB has made this point in their defence.

    Brendan