Key Post Understanding Fixed Rates breakage costs

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

  1. Sean Og

    Sean Og Frequent Poster

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    Sean A why don't you switch to PTSB-BOI-EBS-KBC all in quick succession to get the 2% cash back offers. I was with EBS 5.5 % fixed for 10 years . €24k breakage fee. I have 3 switches completed so far €6000 a time with KBC to come for another €3000. My solicitor is doing me a good deal for the legals which are all straight forward. You will have your €10k breakage fee back in no time and then you can move to the best rate you want to choose from. The pyrite might be an issue however.
     
  2. Lightbulb

    Lightbulb Registered User

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    Just received break fee calculation from BOI. I took out a 3 year fixed mortgage for 300k a year ago. The calc they sent is below.

    The break fee is €640 based on the cost of funding being - 0.11% at the date of fixing and EURIBID (investment rate) at date of break inquiry being - 0.22%.

    Does anyone know of a way of verifying these rates to check they arent just making them up? EURIBID seems to be the rate at which the bank is willing to borrow money. I had previously thought they used EURIBOR which is the offered rate. I think the calc would be more in my favour if they used EURIBOR.
     
  3. RedOnion

    RedOnion Frequent Poster

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    Hi, EURIBOR only exists for terms up to 12 months, so there is no such thing as a 2 or 3 year rate, so not sure what you are using?

    You'd need Bloomberg or Reuters access to confirm interbank rates.
     
  4. Lightbulb

    Lightbulb Registered User

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    The Eonia 2 year rate is - 0.22% on Bloomberg using EUSWE2 (this is technically a swap rate but should be close). I'm struggling to see how they got - 0.11% for the 3 year rate at the time of borrowing. Looks like just have to take them at their word unfortunately.
     
  5. WizardDr

    WizardDr Frequent Poster

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    It would be most unusual for a Bank to hedge its fixed rate mortgages to start with.This is not to be confused with Retail arms not taking the risk but the Treasury side. In BoI case there are two legal entities Bank of Ireland Mortgage Bank being one. It might hedge with treasury BoI but there would not be outside hedging on a general basis. Therefore all the complex calculations are calculating an 'opportunity' cost. With buckets of free funds (interest cost NIL) and Deposits (almost NIL) only a lunatic would hedge outside the Group.
     
  6. RedOnion

    RedOnion Frequent Poster

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    Every bank hedges their fixed rate portfolios, either by matching assets and liabilities, or through external derivatives. To do otherwise would require fair value accounting.
    The fact they have effectively 'free' funding now isn't really relevant. If they didn't have an over supply of deposits they could actually borrow at negative rates in the market.
    And issuing 3 or 5 year fixed rate mortgages must be hedged as it's unlikely they'll be able to fund that at 0% with demand deposits for the full term.

    One of the reasons Northern Rock failed was because they didn't hedge.
     
  7. NoRegretsCoyote

    NoRegretsCoyote Frequent Poster

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    I am coming to this thread late but this may be of interest.

    I am with Bank of Ireland Mortgages and have been back and forth a lot with them about breakage fees. They confirm that R1 (the rate they use for the balance that is redeemed early) is EURBID. This is very close to EURIBOR and can be found online.

    The issue is the value they use for R: the "Original Cost of Funds at date of fixing". I can't find an interbank rate (if this is what they use) for the relevant term in the public domain. So you have to take the bank's word for it.

    For R me they used 0.09% for a one-year term originating in February 2016 which from what I can tell is about 30bp above what EURIBOR was at the time.



    I am due to renew in any case with BoI soon and will take the advice on other threads and threaten to move and seek a lower rate.
     
  8. daveyboy31

    daveyboy31 Registered User

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    Folks-does anyone know has the EURBID rate referred to above used by BOI fallen recently. We paid €15,000 off last Oct/Nov without penalty. We are in a position to pay more off now but when we rang last week and again today we were advised there would be a penalty. We are fixed for 10 years so it would be quite costly. We are hoping to wait for the rates to swing back around in our favour so I assume we should just keep an eye on this Eurbid rate and wait for it to rise? Thanks
     
  9. NoRegretsCoyote

    NoRegretsCoyote Frequent Poster

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    They are obliged to provide you the parameters used in the calculation (and a worked example) in writing, and on request.

    I've had worked examples from BoI in the past and the arithmetic in one case was complete garbage. So it's worth checking yourself.

    You can request this every few weeks if you like.
     
  10. RedOnion

    RedOnion Frequent Poster

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    Did you tell you the amount?
    Interbank Interest rates have moved around a bit, particularly in December.
    Would you save more waiting for break fee to be zero than you would save in interest by making the repayment now?
     
  11. daveyboy31

    daveyboy31 Registered User

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    Last edited by a moderator: 7 Feb 2019
    Hi, my wife was talking to them . I think it was 250 for 10000 and we are on a 3.3% rate so I suppose it depends how long we wait and if it's likely to change. We will be paying off more than that though ( about 35k) . We were a bit complacent as we had wrongly assumed interest rates were as low as they would go. Essentially I suppose it's a question of speculating on whether the rates will go up soon. Cheers though you are right . It is worth factoring in the interest we are paying
     
    Last edited by a moderator: 7 Feb 2019
  12. RedOnion

    RedOnion Frequent Poster

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  13. daveyboy31

    daveyboy31 Registered User

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    Last June
     
  14. RedOnion

    RedOnion Frequent Poster

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    Ah, because you've fixed for 10 years, even small changes mount up. 10 year rate has fallen by about 0.3% since June. Stock market volatility towards the end of last year hammered long term rates.

    The other danger with waiting for rates to rise is you'll hit a point you're compared to the 9 year rate.

    Don't forget with BOI you can increase your monthly repayment by 10% without triggering a break fee. Small beer, but worth doing if you've extra cashflow.
     
  15. daveyboy31

    daveyboy31 Registered User

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    Thanks for that. Yeah i was thinking it was the 10 years that was the issue. If you get a chance could you post a link to view the 10 year rate so I can keep an eye on it. Appreciate you taking the time to advise
     
  16. RedOnion

    RedOnion Frequent Poster

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    Approximation of rate movements:

    I don't have access to real bank funding rates, so I use corporate swap rates as an approximation when estimating break fees for posters.
    Note: these are not the same as interbank rates, but they move in the same direction. I haven't found a material difference in any recalculation I've done for anyone yet.

    The following has free access, and you can select date you want to see:
    https://www.theice.com/marketdata/reports/180
     
    daveyboy31 likes this.
  17. daveyboy31

    daveyboy31 Registered User

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    Thanks RedOnion