"You should not take out a fixed rate mortgage "

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TheManWho

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Update - this seems to be based on the assumption that the 2% cash back is only for fixed rate customers. - Brendan

"You should not take out a fixed rate mortgage " from the best buys page, I'm not sure how strong an argument it is? Isn't it just a gamble that variable rates will go way down? Whilst on the other side fixing with a cashback is a gamble they won't go "way down"? And reality is, no one knows which gamble is the most riskiest?

Say you fix now for 5 years with BOI for 250k mortgage @ 3.3% (say it's 80 LTV) over 30years. You get 2% cash back over the 5 years (on top of this you could put the 5k into the highest APR account for 5years, then switch to variable mortgage after 5 years and pay the (5k + interest ) off the mortgage).

By my quick calculations using the variable rates elsewhere would need to be to an average of 2.65% over the 5 years period for the BOI customer to lose out.

So in reality variable rates would need to go well below 2.65% for a large period of time to average out at 2.65% - rates aren't going to drop to 2.65% any time soon. For new lenders coming in we were hearing possibly 2.9%.

On the face of it, the blanket recommendation to not fix does not seem as convincing. Plus who can predict with any level of certainty where ECB rate will be in 3,4 or 5 years?

ECB rates have been 1% and below since 2009, that's 8 years now almost - will it last 13 years? The eurozone economy will surely recover at some point? So all we are doing in choosing between fixed\variable is gambling on when that point is? Or am I missing something?
 
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To add to the detail in “metricspaces” post. I was into BOI last week in respect to fixing and was informed that they would send out a pack with options, I had to pick 1 and drop back in to the branch.


I am currently 18 months into a variable rate 4.5% and with a LTV 61% -80% I also availed of the 1% cashback at the time of drawdown. So my plan was to fix for 3 years at 3.1%. I received the pack Friday and populated as required, then dropped into branch today, to my surprise I receive another pack today dated 1 day after the first and the rates have gone up. For the 61%-80% the following were the rates in pack 1 and pack 2.

upload_2016-8-29_22-35-15.png


I checked the online rates and they are per the details is Pack 1.


So are BOI fixed rates on the way up?
 
Hmmm. I think my example is not valid. I thought cashback with BOI was only for fixed rate.

So. Then it would make sense to take BOI variable with cashback over other lenders who offer marginally lower variable rates but offer no cashback.

Adding on top of it that apparently banks can't take back the cashback if you switch. Is it a no brainer - go with a lender who offers cashback?
 
Update - I wrote this long and thoughtful response and then found out that BoI has dropped its 2% cash back clawback.

Brendan


The first thing to ask here is why anyone is bothering with Bank of Ireland?

EBS gives 2% cash back without any clawback. Their variable rates are lower, so it's clear that you should go with EBS if they approve you for the amount of the mortgage you want.

Here are EBS's rates:

upload_2016-8-30_7-45-34.png


The equivalent rates in the Eurozone are around 1.5% lower. So when rates are way out of kilter, they should fall.

There are a few reasons why rates should fall towards Eurozone levels over the coming months and years
  • It is expected that Frank Mortgages will enter the market - although we have been expecting this for almost a year now
  • The Fianna Fáil bill to control mortgage rates may cause the Central Bank and the banks to take action to make the bill unnecessary.
  • Individuals can bring their LTV below 80% and so can switch to a cheaper lender.
Bank of Ireland
It is bizarre that the Fixed Rates are below the variable rates at a time when the ECB rate is unlikely to fall much below 0%.

Why are three year fixes priced lower than 1 year fixes? If you put money on deposit, you get higher rates the longer you fix.

From their website

upload_2016-8-30_7-52-0.png


upload_2016-8-30_7-53-48.png


It seems to me that they have pitched their variable rates so high because they know that the vast majority of their existing customers just won't bother going to the hassle of switching.

If they want a cut, they can fix their rate. And then they are tied in to BoI for the duration of the fix. And probably longer as most people just don't bother switching.

Brendan
 
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So take the example: 250k mortgage, LTV < 80%, 30yr term. Is it simple - go for a lender with a variable rate that offers cashback?

UB loyalty variable rates with 1.5k for legal fees would be trumped by EBS higher rates with cashback?
 
metricspaces said:
go for a lender with a variable rate that offers cashback?
Click to expand...

It's not that simple.

1)Take out a variable rate mortgage with BoI and collect the 2%
2) Switch to permanent tsb and collect the 2%
3) Switch to EBS and collect the 2%
4) Switch to UB as they then have the cheapest rates.

:)

Brendan
 
Realistically not many people will go down that route of switching 3 times in a short period of time.

Each time you switch you're going to incur legal fees. So it's not simply a case of picking up 2% each time.

If it actually is possible to switch between all these banks to get the 2% from each. Then is it likely all banks will keep this deal in place long enough for you to get through them all?

Banks are hardly going to keep handing out 2% for long if people jump ship immediately.

Are the other two lenders likely to accept your application if they see you jumped ship from current lender once you got your 2% ? Can new lender tell this?
 
If you don't plan on switching from bank to bank in order to get 2% from each. Then is it a simple as pick a lender with cashback (for the scenario I gave of 250k <80% LTV over 30 years)?

Comparing EBS with UB, it looks like it would take over 5 years for UB's better rates to get you equals to EBS offer with cashback. Does my analysis look correct?

(I used this here to calculate monthly repayments )

ofnkw8.jpg
 
You are approaching this all wrong. The term is not relevant. Forget about repayments.

Just look at the interest charged.

€250k @0.4% = €1,000 a year. So it would take 3.5 years.

So go for the cash back as it's possible you will have switched within 3.5 years.

Brendan
 
Are the monthly repayments I calculated wrong? If they are not wrong, then I can't see where my analysis is wrong?

There's a difference of 55 euro in monthly repayments. It'll take 63 months\5.3 years to get to 3.5k.
 
Monthly payments include an element of capital. The lower the interest rate, the higher the amount of capital in the earlier payments. Your €55 per month is only partly interest.
 
Mrs Vimes said:
Monthly payments include an element of capital. The lower the interest rate, the higher the amount of capital in the earlier payments. Your €55 per month is only partly interest.
Click to expand...

I understand this. I am just looking at the amount of money that will go out of my pocket over a certain period of time - which I'm guessing you guys are saying is the wrong way to look at it. That I should look at the interest paid.

I don't understand how to compare these different mortgage products - when one lender has a low variable rate but no cashback, and another lender has higher variable rate but cashback.

So I don't know what strategy to take to minimize the cost of the mortgage based on the current information I have. Leading on from this, when I figure out what mortgage product to go with initially I'd like to know when it is more beneficial to change - comparing two variable rate products with no cashback is pretty clear I think, go with the lowest rate (and take into account lenders who pass on new rates to existing customers)
 
The point I was trying to make is that your repayment might be €55 lower, but some of that money is going to capital so the outstanding balance will be lower after any given period. You need to account for the lower balance as well as the lower monthly payments to get the full picture.

As Brendan said, compare only interest payments to get the true saving.
 
Mrs Vimes said:
As Brendan said, compare only interest payments to get the true saving.
Click to expand...

For the scenario I have outlined above. UB @ 3.1% has lower interest payments than EBS @ 3.5% - so based on this rationale UB is the one to go with. This contradicts EBS being the best buy. So either there is something I am not understanding (quite likely!) or it's not simply "compare only interest payments"
 
If you look at payments, you are complicating things. I don't have time to reconcile your figures which adopt the wrong approach to an answer worked out the right way.

I used the interest rates. It's simple. If I make an error in one of these calculations, someone else will spot it and correct it.

Brendan
 
As in, compare <interest payments> against <interest payments and cash-back>, strip the capital payments aspect out of it.

If you are looking at monthly payments, you are including a different amount of capital payments in each case, as the amount of capital paid each month depends in part on the interest rate.

In your case, you only want to see how long before you will have paid more interest than the cash-back payment you got, i.e. at a difference of 0.4% you will be paying the 2% cash-back in extra interest in 5 years.
 
What you guys are saying makes sense. All I want to do is understand how I can figure this out myself, so I can see the numbers side-by-side.

Ok. I think I am getting there. I've used this site here to tell how much of monthly is interest Vs principal https://www.easycalculation.com/mortgage/amortization.php

Based on the information from this site it would take 62 cweeks\5.2 years for the interest payments @ 3.5% (minus 5k) with EBS to surpass the interest payments with UB @ 3.1%

This is at odds with the "€250k @0.4% = €1,000 a year. So it would take 3.5 years" from above.

Does my analysis look correct here? Or am I still missing something?

j7yz3o.jpg
 
metricspaces said:
Does my analysis look correct here? Or am I still missing something?
Click to expand...

As I have said a few times, you are taking a simple job and making it complicated.

When you make something complicated, you are liable to make mistakes. And I doubt if anyone would waste time checking your unnecessary calculations.

You remind me of the time I asked a farmer how he counts his flock of sheep. He told me that he counted all the legs, and divided by 4.

Brendan
 
The suggestion was to calculate only the interest paid and take into account the cashback. This is what I have done.

I used the online calculator to calculate the interest paid each month - assuming the calculator is correct https://www.easycalculation.com/mortgage/amortization.php?
I've put the numbers side-by-side in excel.
I added a column for cumulative interest, and for the case of EBS subtracted 5k each month.
There's not much room for error?

The numbers show that it will take 5.2 years for someone with EBS to pay more on interest than someone with UB, rather than 3.5 suggested.
 
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