# Overpaying an AIB mortgage



## WorstPigeon (30 Jan 2016)

I'm currently in the process of buying a house, with an AIB mortgage with a long term. I currently save a large amount every month. My plan is to overpay the mortgage substantially, while the relatively low repayment from having the long term gives me flexibility in case interest rates rise dramatically in the coming years.

From a practical point of view, how does the overpayment work? Can I just transfer money whenever I feel like it with the online banking system, or do I need to commit to a monthly overpay or make occasional lump payments?

Also, does it make more sense to reduce mortgage term or monthly payments with an overpayment? I'd obviously like to pay it off as soon as possible, but on the other hand I am a little concerned that rates will rise substantially at some point, so reducing the capital and leaving the term alone would be comforting from that point of view.


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## Monbretia (30 Jan 2016)

Don't know what AIBs system allows but if you are concerned about flexibility in the future it is better to keep the term the same and reduce monthly payments with the overpayments.   It will be irrelevant anyway as you intend overpaying the amount due and the overpayment will automatically reduce the term without officially having to do so.   

The mortgage will end earlier if you overpay even if you never officially ask AIB to reduce the term and if something should happen that you need to drop back to the revised lower monthly payments then you can do it without having to apply for a term extension which you would have to do if you had officially shortened the term.


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## WorstPigeon (30 Jan 2016)

So, to confirm I understand this correctly, if I overpay without doing anything else, my repayments fall, and the term de facto falls? I feel like I'm missing something here; why would anyone ever formally reduce the term in this case? It seems like it'd make more sense to overpay, constantly ramping up the overpayment as the repayments fall.

Which would suit me fine, really; hadn't thought about it in quite those terms.


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## Dermot (30 Jan 2016)

Your overpayments will cause your monthly repayments to fall as you are reducing the principle.  Your repayment period will remain the same.  The advantage as you already know in doing this is the flexibility it gives you if interest rates rise or some unforeseen event occurs. Just always keep a readily accessible sum available for that rainy day event that might not happen.  Overpaying is also the best return you will get on your money as of now.


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## Monbretia (30 Jan 2016)

Some people just reduce the term as they like the idea of a shorter term but the other way is the more flexible and really has the same result in the end.


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## WorstPigeon (30 Jan 2016)

Yeah, my plan would be to build my savings back up to what I'm comfortable with (they'll be taking a big hit paying the deposit, of course...) then divert the money I currently save each month to overpayments. Is there any particular downside to this plan?

With my current income and current interest rates (or even substantially increased rates) I should be fine, but I'm not totally comfortable with the idea of being in significant debt (I'm a first time buyer, and have never been in debt up to now), and would like to do all I can to avoid ever having difficulty paying it back if circumstances change.


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## Dermot (31 Jan 2016)

Your plan looks very sensible to me anyway.  Something similar to what I done myself many moons ago.  I did reach a stage when I was able to pay it all off 5 or 6 years early and it made me feel happy at the time.


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## so-crates (31 Jan 2016)

WorstPigeon said:


> Yeah, my plan would be to build my savings back up to what I'm comfortable with (they'll be taking a big hit paying the deposit, of course...) then divert the money I currently save each month to overpayments. Is there any particular downside to this plan?



The only downside is the earlier the overpayment starts the more effective it is. To simplify it with an unlikely but very simple example, think of having a single €1000 sum that you can repay anywhere in the first three years. If you choose to wait until the third year to use it then interest on it will also have to be repaid, if you'd used it at the very start, no interest would have been charged on that €1000.


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## WorstPigeon (31 Jan 2016)

Yep, I don't plan to wait all that long to start overpayment; just enough to rebuild savings to a slightly healthier level.


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## Brendan Burgess (31 Jan 2016)

The only issue here is your Loan to Value. 

If you are borrowing over 80% LTV, you will be paying AIB 3.75%. If you are borrowing less than 80%, you will be paying 3.55%. 
However, if you start with over 80% and reduce it below 80%, you don't get the lower rate. 

Ulster Bank does allow you avail of the lower LTV rates when you reduce the LTV, but their rates are higher so it doesn't really matter. 

But if you can get the AIB mortgage at the start below 80%, then you get a 0.2% saving for the life of the mortgage. 

Of course, it's likely that over the coming year, competition will bring rates down anyway, so it's quite likely you will switch from AIB if they don't bring rates down further.

Brendan


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## WorstPigeon (31 Jan 2016)

Yes, one of my regrets with this is that I come in a little over 80% LTV, so will be paying an extra 0.2%. It might be more financially prudent to buy something a bit cheaper. However, financial prudence, at the end of the day, isn't everything.

I told myself going into this that I'd only buy a place I could see myself in for a long, long time, as opposed to my first rung on the 'ladder' (I know a lot of people who were badly burned by the whole ladder concept towards the end of the bubble, buying unsuitable houses in the middle of nowhere etc.) So I've been looking a while, and have been very fussy. The place I'm buying is pretty much ideal in terms of location, layout etc, and absent a big change in personal circumstances I don't see myself wanting to leave it.

For that, I'll put up with the extra 0.2% interest rate. As you say, unless prices drop sharply, moving lender with a sub-80% ltv may well be an option in a year or so anyway, given that I'll be overpaying a fair bit.

Maybe I'd be wiser sit tight and save, and hope for further price drops, but at this point I really just want to get on with things, and if prices star rising again this could backfire. It's not like there are loads of equivalent houses on the market, either; I might be a while waiting for something in such a good location and small enough to be in my price range (and with a south-west aspect and so on and so forth, as I say I have been kind of fussy) to show up again.


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## Brendan Burgess (31 Jan 2016)

If you are ready to go and have found the house you want, then go for it. The 0.2% is not worth it. In practice, it's only for a year or so, as you will be able to switch lenders after a while and get a better rate.

Brendan


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## dogfish (31 Jan 2016)

If going to overpay do not fix the rate of interest.  The bank will more than likely penalize you for loss of interest if you do. If you are going to overpay leave it on variable rate.  I did the lump sum option on my mortgage.  Would pay off lump sums every time I had fair amount saved up.   I was a great feeling seeing the balance drop.  I kept the term of the mortgage.


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## WorstPigeon (31 Jan 2016)

Yep, planning on sticking with a variable rate, both for the ability to overpay and because I doubt rates are going up much in the next few years (if nothing else, AIB's fixed rates are ridiculously generous if they do expect rates to go up...) My worries about rates going up substantially are more over the next decade.


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## WorstPigeon (1 Feb 2016)

On a related note, what's a reasonable level of savings to have? Assuming all goes well and the sale goes through, after stamp, legal, survey, furnishing costs etc., I'll have about 6 months expenses (mortgage, living costs etc etc) saved. Does this seem reasonable, or should I build it up a bit before starting to channel most surplus into overpayment?

My income is fairly secure, and cost of mortgage will only be a little higher than rent (for a bigger place in a much better location; Dublin rents have gotten a bit silly lately); I'm just used to having a big buffer, a lot of which will be going on paying the deposit.


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## so-crates (1 Feb 2016)

Even the best laid plans of mice and men... Despite the level of preparation you have put in (and it is admirable to see you have thought it through, including all the costs you can think of) it is very probable that the first few months will present you with a few unexpected things. 6 months is a reasonable buffer and I am assuming you are not planning on never saving again (as in you won't just divert all money into overpayment) but it might be worth giving yourself a settling in period to ensure you are on track. Savings can always be accessed; overpayments, once made, are gone for good.


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## Brendan Burgess (1 Feb 2016)

This is a difficult one to judge. The conventional wisdom on askaboutmoney and elsewhere is overly conservative in my view. When things settle down,  you don't really need that much. You have a good reliable income. You can probably get an overdraft or Credit Union loan if you need it in a hurry. Or you can borrow short-term from family 

However, I agree with socrates that you should keep a good buffer in the initial stages as you may well have unexpected expenditure. However, if using up all your cash got you below 80%, that would be more important than having a buffer. 

Come to think of it, if you are just marginally over 80%, any chance you could ask for a short-term family loan to bring you below the 80%?  It's exactly the type of loans which family and friends are for.  You don't really need it, but you get a great return on the loan.

Brendan


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## WorstPigeon (1 Feb 2016)

No, I wouldn't want to be asking my family for money, certainly not for the sake of the 0.2%  I'm inclined to try and find things to worry about, but I realistically should be just fine.


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## WorstPigeon (2 Feb 2016)

Is there a calculator that can show me the impact of overpaying to reduce the capital, without reducing the term? The drmortgage calculator only seems to support reducing the term.


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## so-crates (3 Feb 2016)

"Reducing the term" is confusing. Basically any overpayment always reduces the effective term (as in how long it will actually take to pay back) but doesn't mean your bank can assume you'll pay it off early - you retain the agreed term. The agreement with the bank targets a specific number of months to repay at an agreed rate, while you can choose to overpay, the bank cannot presume that means you want to repay early, they won't change your agreement without you requesting it. Where you request the bank to reduce the term, the outstanding balance will be recalculated over the new term. So just overpay, know that the mortgage will pay off earlier than anticipated but that you have the option of reducing your repayment if things get tough.

One thing to note, every rate change means a recalculation of your repayment amount over the remaining agreed term. If you are overpaying, this means that the new repayment calculated will be less than the amount that would have been recalculated if you hadn't overpaid.


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## boe (3 Feb 2016)

WorstPigeon said:


> Is there a calculator that can show me the impact of overpaying to reduce the capital, without reducing the term? The drmortgage calculator only seems to support reducing the term.


If you go to Settings, you can change this to show the impact if you were to reduce the payment.


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## WorstPigeon (3 Feb 2016)

boe said:


> If you go to Settings, you can change this to show the impact if you were to reduce the payment.



Ah, thanks, just what I'm looking for. At the level of overpayment I'm looking at, it all looks pretty reasonable.


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## boe (4 Feb 2016)

WorstPigeon said:


> Ah, thanks, just what I'm looking for. At the level of overpayment I'm looking at, it all looks pretty reasonable.


No problem. I'm considering paying a lump sum myself at the moment. The temptation is to just reduce the term but the advice seems to be to reduce the payment amount via the lump sum but continue to pay your mortgage at the current rate as this gives the most flexibility if you run into difficulties in paying the mortgage down the line.


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## celticbhoy32 (5 Feb 2016)

Hi im thinking of throwing a lumpsum at my mortgage too. Just want to be sure doing the right thing. Mortgage taken out in 09 for 198000. Circa 160000 remaining at 3.5per cent. Currently fixed with aib (know i cant put lumpsum til back on variable). Thinking of releasing 10k. Is that even considered a lumpsum??


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## Dermot (5 Feb 2016)

celticbhoy32 said:


> Thinking of releasing 10k. Is that even considered a lumpsum??


 It will be treated as a lump sum but just mention it when lodging it to them that you wish to keep your term the same for flexibility.  They used to send you out a letter afterwards acknowledging it as an "out of course payment"


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## bungaro (5 Feb 2016)

really interesting thread as i was just coming in to ask something like the op. 

basically we're in negative equity and are 7.5 years into our 35 year mortgage. we want to trade up in the next 18 months and i'm hoping that we will break even when we sell. with a loan from our parents and some savings we should have our 20% deposit for the next place (and after reading this thread we will hopefully get under the 80% if possible for the lower ltv rate). we pay our mortgage fortnightly and we are on the aib 1 year fixed rate. i was thinking of over paying the mortgage slightly to reduce it a bit faster (and bring it towards break even price) but i am unsure of a couple of things after reading this thread.

1. as we are on a fixed rate, would we get penalised for overpaying??

2. can i just set up a direct debit or just pay here and there into the mortgage account if i have the correct details or would i need to contact aib to inform them of this beforehand??

3. does the over payment come off the amount borrowed or does some of it go towards the interest??

4. would overpaying be viewed negatively in anyway if going for another mortgage!?

thanks


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## Dermot (5 Feb 2016)

bungaro said:


> 1. as we are on a fixed rate, would we get penalised for overpaying??
> You will be penalised for any payments over and above the fixed rate for the term of the fixed rate.
> 
> 2. can i just set up a direct debit or just pay here and there into the mortgage account if i have the correct details or would i need to contact aib to inform them of this beforehand??
> ...



Absolutely not.

Also consider that in 18 months time you are going to have to allow for selling and purchasing costs.  They could be significant.


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## bungaro (5 Feb 2016)

thanks dermot, will look into it a bit more so. might be a better option when we get the next mortgage. read something on the sunday times business section a while back, some guy was paying his mortgage by 1/3 fixed and 2/3 variable. never knew this was even an option but it was something to do with overpayment too. think he was saying that he didn't get charged for the overpayment as he was over paying on the variable section?!


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## Dermot (5 Feb 2016)

bungaro said:


> some guy was paying his mortgage by 1/3 fixed and 2/3 variable. never knew this was even an option but it was something to do with overpayment too. think he was saying that he didn't get charged for the overpayment as he was over paying on the variable section?!


Those type of mortgages were common enough at one time and you correctly understand the overpayment in that situation


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## Rory_W (5 Feb 2016)

much as i would never advocate borrowing on a credit card, is there any merit in borrowing the balloon required to bring mortgage below 80% on the credit card and then repay the credit card ASAP and benefit from 0.2% saving on mortgage ? Or a credit union loan for the shortfall ?


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## Dave_Curry_IMC (6 Feb 2016)

Rory_W said:


> much as i would never advocate borrowing on a credit card, is there any merit in borrowing the balloon required to bring mortgage below 80% on the credit card and then repay the credit card ASAP and benefit from 0.2% saving on mortgage ? Or a credit union loan for the shortfall ?


The banks need to account for and be satisfied with the sources of the deposit funds. It's very unlikely that they would allow any part of it to be borrowed. Much better to get a gift for the shortfall.


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## losttheplot (6 Feb 2016)

Give the much higher rate on a credit card it would have to be paid of quick to make it feasible. If you're going to get the money quickly to pay the credit card just put it off the mortgage.


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## WorstPigeon (9 Feb 2016)

One other question on this. Say I end up overpaying substantially, and a couple of years down the line, prices haven't dropped, I've got a lower ltv, and switching looks like it makes sense. At that point, how would the bank I'd be applying to see the overpayment? Would they see it as a positive (demonstrates ability to pay), or not relevant at all? Or would they see it as a negative, because if I keep it up, it reduces the money they make off the mortgage in the long run?


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## celticbhoy32 (7 Feb 2017)

Hi just a query regarding overpaying on mortgage or transfering lump sum. I contacted aib re same and was told to transfer it to diff account, quoting my own account in the narrative. Is there a reason I can't just transfer directly to the account my direct debit goes to every month??


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## WorstPigeon (8 Feb 2017)

celticbhoy32 said:


> Hi just a query regarding overpaying on mortgage or transfering lump sum. I contacted aib re same and was told to transfer it to diff account, quoting my own account in the narrative. Is there a reason I can't just transfer directly to the account my direct debit goes to every month??



I overpay mine through online banking; see [broken link removed] . Had to add the mortgage account as a payee (just entered the account number and it appeared) but that was it. Been doing this for a year; no problems so far.

When I rang them up I was told this wasn't possible, but the AIB support on boards.ie say it is, and it seems to work.


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## celticbhoy32 (10 Feb 2017)

WorstPigeon said:


> I overpay mine through online banking; see [broken link removed] . Had to add the mortgage account as a payee (just entered the account number and it appeared) but that was it. Been doing this for a year; no problems so far.
> 
> When I rang them up I was told this wasn't possible, but the AIB support on boards.ie say it is, and it seems to work.


Thanks for the reply. Spent last two days ringing bank of ireland. They've now come to the conclusion that the iban can not be added. I've (hopefully) worked around it by using revolut to transfer a test amount to the mortgage account (40 euro) if this goes through without issue I'll transfer larger sums and overpayments on a regular basis


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## pclarkeo (6 Mar 2017)

bungaro said:


> 3. does the over payment come off the amount borrowed or does some of it go towards the interest??
> 
> If you are paying your mortgage in full any "overpayment/lumpsum" will be effectively coming off your principle thereby reducing your mortgage repayments



I was in AIB recently asking this very question. I'm on a variable rate.
I was told if I pay off a lump sum in the first year a large proportion would just be interest. I was surprised by this after reading some points on here, namely the above and one poster saying that a great guaranteed return on your money would paying off a lump sum of your mortgage.

Does anyone have experience with this?


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## WorstPigeon (7 Mar 2017)

pclarkeo said:


> I was in AIB recently asking this very question. I'm on a variable rate.
> I was told if I pay off a lump sum in the first year a large proportion would just be interest. I was surprised by this after reading some points on here, namely the above and one poster saying that a great guaranteed return on your money would paying off a lump sum of your mortgage.
> 
> Does anyone have experience with this?



This _sounds_ incorrect. Definitely my overpayments have just come off the principal.


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## pclarkeo (8 Mar 2017)

WorstPigeon said:


> This _sounds_ incorrect. Definitely my overpayments have just come off the principal.



Ya its doesn't sound right to me.

With your overpayments, do you do overpay monthly and if so did you keep the same term? Is the new repayment amount recalculated monthly also?

Just wondering how long it takes to recalculate. Say if I overpayed by 100 each month, would the recalculation happen before the next payment is due, adding to the over payment.


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## WorstPigeon (8 Mar 2017)

pclarkeo said:


> Ya its doesn't sound right to me.
> 
> With your overpayments, do you do overpay monthly and if so did you keep the same term? Is the new repayment amount recalculated monthly also?
> 
> Just wondering how long it takes to recalculate. Say if I overpayed by 100 each month, would the recalculation happen before the next payment is due, adding to the over payment.



Yeah, I overpay monthly, keeping the term the same. My mortgage payment's taken around the middle of the month, I'm paid at the end of the month, and normally overpay once I'm paid. By the time the next payment is due the payment is automatically reduced. Then they send me out a letter confirming the overpayment; if I keep it up for the whole term I'll have killed a small tree doing this... I've never tried overpaying just before the payment is due, so not sure how long it takes to take effect.


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