Why are 20% of new mortgage holders paying high variable rates when they could fix at a much lower rate?

NoRegretsCoyote

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Seems about 20% of new mortgages are on variable rates, paying about 80bp more.

Am just astonished at the free money so many customers are leaving on the table by not choosing a fixed rate.
 

Sarenco

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Am just astonished at the free money so many customers are leaving on the table by not choosing a fixed rate.
Bear in mind that some borrowers will be trading up from a home with significant equity. In those circumstances, it may make sense to opt for a variable rate if the borrower intends to pay off the mortgage in short order once the first home is sold.
 

NoRegretsCoyote

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Bear in mind that some borrowers will be trading up from a home with significant equity. In those circumstances, it may make sense to opt for a variable rate if the borrower intends to pay off the mortgage in short order once the first home is sold.
That's a fair point. 38% of new lending to owner-occupiers in 2019 by value was to mover-purchasers, 62% to FTBs.

But I can't see people you describe above comprising half of the mover-purchaser population.

The statistics on the stock of outstanding mortgages also tend to suggest that a lot of people stay on variables even though cheaper fixed rates are available.
 

Brendan Burgess

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Seems about 20% of new mortgages are on variable rates, paying about 80bp more.
The are probably customers of AIB which has the lowest variable rate?

I agree that people should fix, however it's not as clear as you suggest. Irish mortgage rates are excessive and should come down towards eurozone levels. Someone fixing today might regret it if fixed rates are reduced further. (Mind you, I have been saying this for some years.)

Brendan
 

skrooge

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I'm not sure I agree with the idea that you should fix all of your mortgage.

Fixing all your mortgage may minimise current costs but might not be optimal over the life of a mortgage. This is only for those who are in a position to overpay.

Minimising the life time cost of a mortgage is always a trade-off between getting the lowest rate and keeping the flexibility to overpay (minimise term). Low rate, low term is the aim.

If you structure your mortgage in such a way that you fix the portion of your mortgage that you know you can't pay off in the short term. You combine the safety net of a fixed mortgage and also allow you to overpay. Its effectively recreating an Ulster Bank fixed mortgage with an option to overpay a % implicitly baked in.
 

Merowig

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FTB here with AIB - fixed 80% of the mortgage for three years for 2.45% and 20% variable at 2.95%. I plan to overpay monthly.
After three years I will review again the situation and will possibly continue similar as above - Fix a part of the remaining mortgage and another part variable.
I didn't want to fix longer as I expect that rates go down further and one can't rely on low/zero breakage fees. And I definitely want here to overpay as well.
 

NoRegretsCoyote

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FTB here with AIB - fixed 80% of the mortgage for three years for 2.45% and 20% variable at 2.95%. I plan to overpay monthly.
This is a complete false economy. You are paying an extra €300 a year on a €300k mortgage. You would need be overpaying at about €300 a month on a €300k mortgage to break even.

It makes more sense to fix the whole amount and just "overpay" into a deposit account at 0% and then overpay when the three-year term is finished. Or if your repayment capacity is that good just look for a shorter term.

Note: I edited this post as I over-estimated the break-even value by about a factor of three.
 
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Merowig

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now
This is a complete false economy. You are paying an extra €300 a year on a €300k mortgage. You would need be overpaying at about €900 a month on a €300k mortgage to break even.

It makes more sense to fix the whole amount and just "overpay" into a deposit account at 0% and then overpay when the three-year term is finished. Or if your repayment capacity is that good just look for a shorter term.
Thank you!
Total Mortgage amount is much less then your numbers. I will get my yearly bonus and RSUs payed out in late spring which will reduce a big chunk of the variable part on top of the planned monthly overpayments
But I have to admit I didn't do the exact maths.

I did check the extra interest payments- and I would be in year one worse off by 211 Euro without any overpayment, in year two by 209 Euro and 205 in year three. May I ask how did you calculate the break even?
 
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NoRegretsCoyote

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I did check the extra interest payments- and I would be in year one worse off by 211 Euro without any overpayment, in year two by 209 Euro and 205 in year three. May I ask how did you calculate the break even?

Apologies I didn't get the calculations wrong by quite a bit.

I think it's more like needing to overpay 300k a month on a €300k mortgage to break even. This scales, so €100 a month on a €100k mortgage.
 

skrooge

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Apologies I didn't get the calculations wrong by quite a bit.

I think it's more like needing to overpay 300k a month on a €300k mortgage to break even. This scales, so €100 a month on a €100k mortgage.
Over 3 years with no overpayments I make it an additional interest charge of €883.38 (on 300k). Just under €300 for year 1. To breakeven you'd want to be overpaying by about 555 per month. This is about €570 more when compared with fixing the whole amount.

For 100K an overpayment of €185 a month is required to breakeven. Or €190 over what you'd pay if you fixed the whole amount
 
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Merowig

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Total mortgage is 212800 - 170240 is fixed - 42560 is variable - 29 years running
repayment rate is 683,59 + 182,01 = 865,60 per month - I was planning , on top of occasional once off overpayments from bonus, etc , to round my monthly payments up to 1000 or 1100 Euro.

How is the break even for overpayment calculated?
Thank you
 
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skrooge

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Forget repayments, you have to look at the interest element. This is the real cost of the money you borrow.

My overpayment number is the amount of additional capital payments you'd have to make each month to ensure the interest paid over the three years was the same between the two scenarios (fixing all Vs fixing part).
 
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Merowig

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NoRegretsCoyote advised on 100k mortgage an overpayment of 100 Euro and you of 185.
Is there a method to calculate that precisely? (I am a bit braindead today after only 3 hours sleep so any advise would be highly appreciated.)
Total mortgage is 212800 - 170240 is fixed - 42560 is variable - 29 years running
2.45% fixed rate and 2.95% variable rate.
Thanks
 

skrooge

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All you need is a good spreadsheet. The focus is the €42,560 and how much extra interest you'll pay by keeping it variable.

First, calculate your minimum monthly repayment (this is made up of interest and capital) - the PMT formula will do this - this is effectively what you're direct debit would be. In your case your monthly repayment @2.95% should be €182. Remember only focusing on the variable rate element.

Second, what will the outstanding mortgage be in 3 years time (assuming the alternative option is to fix for 3 years). The FV (future value) function will do this. Again using your numbers your €42,560 can expect to decline to €39,647

How much interest will you pay? You'll pay a total of 36*PMT and your mortgage will reduce by €42,560-FV. the difference between these two numbers is your interest expense. For you €3,643 (A)

Redo the above using the fixed rate interest rate and you'll get a different, PMT, FV. From them calculate your alternative interest expense = €3,017 (B). In other words you'll pay an extra €626 (A-B) for the pleasure of staying variable.

The above assumes you do nothing other than pay the minimum. However, you can tweak your monthly repayment (PMT) that you used in your original FV formula. By doing this you will pay more and in turn accrue less interest. Trial and error is the best bet here. You'll eventually land at a number €575. That number produces an interest expense, over 3 years, equal to €3,017 i.e., this is the amount you'd have to commit to pay each month to leave you no worse off than if you'd fixed.


Looking at the big picture, fix it all and you'll be paying €855. Leave 20% variable and you'll want to be paying more than €1,259 a month towards your mortgage to make the variable worthwhile.
 

RedOnion

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Yes, about 575 is the overpayment required to break even.

BUT

I think the whole thing is being over complicated.

If you want to repay a part of your mortgage early, you can do at any time. A break fee is calculated only on the part you're overpaying, not the full balance.

There's a full 0.5% difference in the rates in the example above. So, using a 3 year fixed term, at the end of year 1 you've paid 0.5% extra interest on the variable portion. Funding rates would need to have dropped by more than 0.25% for the break fee to exceed the interest saved by just fixing it all. At the end of year 2 they'd need to have dropped more than 1%!

Given the size of the rate difference, I'd be fixing it all. (I'm ignoring here the fact that AIB cannot currently charge a break fee on their 3 year fixed rate due to their own terms & conditions. Covered elsewhere, but their 2 year rate needs to drop below 2.45% before they can charge a break fee).

It makes more sense to fix the whole amount and just "overpay" into a deposit account at 0% and then overpay when the three-year term is finished
This is a common misconception that comes up frequently. Just to clear it up, the break fee will ALWAYS be less than the interest saving by paying it off early. Putting it in deposit at 0% and waiting until the end of fixed term is just throwing money away.
 

NoRegretsCoyote

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This is a common misconception that comes up frequently. Just to clear it up, the break fee will ALWAYS be less than the interest saving by paying it off early.
Indeed.

But @Merowig 's original logic seemed to be to retain 20% of the mortgage on a variable rate so that they could overpay regular amounts. And in that scenario it makes more sense to fix the full amount and accumulate in a deposit account til the end of the term (unless your planned overpayments are very large).

If you have a lump sum to pay off it is of course cheaper to break.
 

RedOnion

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And in that scenario it makes more sense to fix the full amount and accumulate in a deposit account til the end of the term (unless your planned overpayments are very large).
'more sense' is the key to your statement.

But what I said makes even more sense than that! ;)

It doesn't really matter what size the overpayments are. The facts are the same. It NEVER makes sense to accumulate funds at 0% if the intended use is to pay against mortgage.

Say you've an extra 100 per month, and you've fixed for 3 years @3% interest. If you pay that 100 monthly, rather than as a lump sum at the end of 3 years, you'll have saved €162 interest.

Any additional administration work is the responsibility of the bank, not the borrower.

Bear in mind that AIB and EBS are the only lenders that don't allow any overpayment without checking if a break fee applies.
 

NoRegretsCoyote

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Say you've an extra 100 per month, and you've fixed for 3 years @3% interest. If you pay that 100 monthly, rather than as a lump sum at the end of 3 years, you'll have saved €162 interest.

Any additional administration work is the responsibility of the bank, not the borrower.
I didn't know banks had to facilitate small regular overpayments like this.

You learn something new every day :)
 

Merowig

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Thanks a lot to all for the explanations of the calculations and for the other information here provided by all.

If I fix all of the variable or a part of the variable - do I have again fees with the solicitor on that?
So one can fix everything and still overpay monthly - just with the administration involved here of having to ask every month if there is a break fee?
Do I need to expect any negative backlash here from AIB if I do that? E.g. in three years time they decline fixing my mortgage again?
Anyone here who overpaid that way monthly a fixed mortgage?
 
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