How much is KBC's overpayment offset worth?

gnf_ireland

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I have attempted to calculate the benefits of KBC's overpayment facility which allows a customer to claw back these funds at any time. I believe my calculations are correct, but would ask that others do review them to see if I have made any clangers in the calculations.
Obvious health warning is to check the terms of overpayment claw back with KBC directly, just in case the rules change

Please note all figures are completely fictional, although the scenario in general does apply.

Lets say Mr Jones has a 300k mortgage with KBC @ 3.55% over 20 years, with monthly repayments of 1748. Now lets say Mr Jones decides he is willing to pay 2000 euro a month against the mortgage, which would equate to a 252 euro a month overpayment. This would take 3 years 5 months off the term of the mortgage. Mr Jones also has 50,000 in notice deposits @ 1.5%, effectively earning him 37.50 euro a month after DIRT (450 a year)

However, Mr Jones is annoyed that KBC will not offer him the 3.25% rate on offer and is thinking of moving to Ulster Bank instead to avail of the 3.35% rate. This move would reduce his mortgage repayments to 1707, but Mr Jones continues to pay 2000 euro + 37.50 from the interest. This would be an over payment of 330.50. This would save 4 years 3 months off the mortgage term. My calculations also show that after 5 years the mortgage balance is 221,087 and 10 years its 127,815.

Instead of doing this, Mr Jones could overpay the KBC mortgage by the 50k savings, knowing he can claw it back at any stage. At 3.55%, the 250k mortgage would now have repayments of 1457 a month. Assuming he continues to pay 2000 a month against the mortgage, this would equate to 543 overpayment and save 6 years and 11 months off the term of the mortgage. My calculations also show that after 5 years the mortgage balance is 167,430 and 10 years its 68,840.

Taking into account that in the Ulster Bank scenario Mr Jones still has 50k on deposit, the comparison figures at 5 and 10 years would be
Ulster KBC Saving
Year 5 171,087 167,430 3,657
Year 10 77,815 68,840 8,975

Obviously, this calculation only applies to customers who are in a position to overpay their mortgage on a monthly basis (or pay a lump sum against it), while giving them the added security that they can claw back the funds at any stage. This effectively uses your mortgage account as a deposit account.

So in the event the customer is in this position, does it make sense to switch from KBC even though there are better rates available? My calculations show that there are greater savings to be made by utilising the overpayment mechanism - or are my sums completely incorrect?


Calculations made using
 
I'm with KBC too and use the overpayment option. However my thinking is that the most I'll ever want to withdraw is about €10K. So when I move I'll put €10K into some kind of savings account. I have a couple of credit cards so in an emergency I can get a fair bit more if I needed. I don't know what scenario would arise where I'd need the money quick but I like having some there as a backup.

I'll still overpay the new mortgage but I'll just keep €10K aside for emergency.

As well as that you mention Ulster Bank. I've just kicked off the process to start moving to them.
They have a 3.2% fixed rate for 3 years if you meet their conditions so your savings increase a bit there too. I've run my mortgage through a couple of spreadsheets. By moving, assuming todays rates, I'll save €40K over the life of the mortgage and that's without making any overpayments.

That's all assuming todays rates. I'm sure the second I switch to Ulster Bank, KBC will make some kind of reduction for existing customers. That's normally how my luck works. But the UB rates are very low and they change their rates as your LTV changes so I'm happy enough for now. I can still switch to a different lender if UB annoy me as much as KBC have in the future.
 
@qwerty5 Fair point re the level of reserves for emergencies. As an IT contractor, I would tend to try and have more reserves just in case I am out of work for a while, but appreciate not all would have the same risks. I have also put money aside to extend into the attic in the future, which could also be used in the same manner. This as you said above is a personal decision based on individual circumstances.

However, for the purpose of the calculation, I have worked out 3 scenarios that hopefully will make sense

Person A - Mortgage of 260,000 @ 3.55% with KBC, but overpays by 10,000. Monthly repayments are 1457 (based on 250k)
Person B - Mortgage of 260,000 @ 3.35% with Ulster Bank. Monthly repayments are 1488, less net interest of 7.50 on 10k deposit = 1480.50
Person C - Mortgage of 260,000 @ 3.2% with Ulster Bank. Monthly repayments are 1468, less net interest of 7.50 on 10k deposit = 1460.50

Assume 10,000 deposit @ 1.5% = 150 interest a year * 0.6 (DIRT) = 90 euro net/12 months = 7.50

Based on this (simplistic) calculation, the overall KBC package is better - or am I missing something ?

*Note* - I am not a fan of the way KBC are treating existing customers (I am one myself), but I am playing devils advocate here to see if based on my calculations the KBC facility works out better if you are in a position to overpay
 
They have a 3.2% fixed rate for 3 years if you meet their conditions so your savings increase a bit there too.

Understand this, but as I want to overpay the mortgage on a regular basis, I am not considering fixing at this stage
 
Interesting to think of the facility to re-draw principal payments made ahead of schedule as the equivalent of a high-yield savings account. This certainly has a value where there is a significant spread between mortgage and deposit rates, particularly for somebody with "lumpy", irregular income.

Having said that, it's probably more accurate to think of the re-draw facility as being more akin to a line of credit that could, potentially, be cancelled by the bank when you need it most.

Does the re-draw facility form part of KBC's loan agreement or is it simply a matter of practice?
 
It's part of their product and sold as such.

It's handy when your on their 4.3% rate. It's like saving in a bank at 4.3% with no Dirt.
 
It's part of their product and sold as such.

It's handy when your on their 4.3% rate. It's like saving in a bank at 4.3% with no Dirt.

Understood but I would be interested to know if the facility to re-draw advance principal payments is a contractual entitlement (i.e. is there is any danger that KBC would pull the facility?). I can certainly see that the facility could be very valuable if a borrower is in a position to avail of it.
 
@Sarenco In my overpayment confirmation letter, the following wording was used by KBC
"If you wish to redraw these funds at any time please send us a written instruction signed by all parties to the mortgage Please be advised, if you withdraw funds from your mortgage account your capital balance will increase thus increasing your scheduled monthly repayment"

Given the statement is clear in the confirmation letter, I am not sure they can change those terms without adequate notice, and in that event the funds can be redrawn if required. However, until that date the assumption has to be made that the details in the confirmation letter are binding on KBC
 
Hmmm.

I think I would be more comfortable if the letter said you shall be entitled to redraw funds. There doesn't appear to be any express contractual commitment on the part of KBC to honour any instructions received in this regard. I'm not saying they wouldn't do so but in times of financial stress...
 
Its not a product ned its a facilty they allow on a product, the product being mortgages.

They no longer allow the facility except in the case of individuals that had originally being granted the facility ie they will honour it for them.
 
I think I would be more comfortable if the letter said you shall be entitled to redraw funds.
I queried this with KBC and was told it was not available to me and I would have to redraw all the funds immediately or they would be treated as an over-payment without the ability to redraw. I then went through their internal disputes process in the first half of the year and have agreed that all over-payments made to date were redrawable, but any new over-payments are not. This is acceptable to me and I have this in writing from them.

Do kbc still offer this product?
No, according to KBC this facility was withdrawn in 2013 (or so), and it only now applies to existing customers with it.
 
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