# How do lenders calculate cost of breaking a fixed rate?



## KeyPoster (6 Nov 2008)

hi there

i have a 3 yr fixed mortgage with AIB .we are only in year 1 of this agreement. with ECB cutting rates today and going to cut further what can i do here? if i pull out of the agreement here, will there be a penalty? what are the chances of my current bank offering me better rates to stay? do you need a solicitor to re-mortgage or is it all done via the banks

thanks


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## Dave Vanian (6 Nov 2008)

If you break a fixed rate the bank can charge you a penalty, but they might not - the only way to know for sure is to ask them.  There should be no other cost involved.


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## limerickboy1 (6 Nov 2008)

according to AAM you have to pay legal fees and land registry etc again which could cost 1000


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## plant43 (6 Nov 2008)

limerickboy1 said:


> according to AAM you have to pay legal fees and land registry etc again which could cost 1000



That's only if you swtich lender. If you're staying with the same lender then all you might have to pay is whatever penalty they impose.


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## limerickboy1 (6 Nov 2008)

oh right. so you have to pay to move lender but not if you move from one product to another using the same lender???


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## plant43 (6 Nov 2008)

limerickboy1 said:


> oh right. so you have to pay to move lender but not if you move from one product to another using the same lender???



Pretty much. The lender may decide to impose a penalty on you if you're moving from their fixed rate to their variable rate package. Best thing is to ring your current lender.


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## limerickboy1 (6 Nov 2008)

ok i will. do u have any idea what the penalty could be, a cash sum , a % of the total mortgage?


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## plant43 (6 Nov 2008)

limerickboy1 said:


> ok i will. do u have any idea what the penalty could be, a cash sum , a % of the total mortgage?



I have a heard a figure of 6 months interest before, but I've no idea how accurate it is.


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## NorfBank (6 Nov 2008)

Only your bank can tell you that. 

It depends how much you breaking the fixed rate is going to cost them. If it costs them nothing then no penalty.

Basically if you are on a really low fixed rate they will be glad to take you off it, if you are on a high fixed rate (and making them money) there will be a penalty.


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## Kate10 (7 Nov 2008)

Limerickboy,

We just broke out of our AIB 3 year fixed rate mortgage, only 6 months into the term.

You need to check your general conditions for the formula for breakout cost but ours worked like this:

They charged us the difference between our fixed rate, and the 3 year fixed rate they were charging on the day we broke out (so we fixed at 5.25% and the rate the day we broke out was 5.20% so difference is .05%) multiplied by the balance of your term (in our case 2.5 years) multiplied by the balance of your mortgage (say €500,000) = €625.

I think at that price you would be nuts not to break out with interest rates coming down the way they are.

The only thing is, you need to move FAST!  As interest rates come down AIB will probably drop their 3 year fixed rate, which will mean that the cost of breaking out will go up.  For examply, if AIB dropped their 3 year fixed rate from 5.20% to 5.00% next week, the breakout cost on a €500K mortgage (as per example above) would go up to €3,125, which is a lot more intimidating.

So if you are going to breakout, do it quickly!!

By the way all they need from you to do the breakout, is a letter signed by you and your cheque for the breakout cost.

Best of luck,

Kate


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## PaddyW (7 Nov 2008)

Kate,

What way should the letter be worded?


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## kopkidda (7 Nov 2008)

Kate10 said:


> Limerickboy,
> 
> We just broke out of our AIB 3 year fixed rate mortgage, only 6 months into the term.
> 
> ...



Hi kate,

We fixed at 5.2%,the rate for 3 year fixed is still 5.2%,so going by your formula it should be free for us to change to a variable rate?


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## Kate10 (7 Nov 2008)

Hi guys,

Paddy the letter should say something like this:

"Dear Sirs,

We refer to our mortgage ref no (insert number) and we write to instruct you to move our mortgage from our fixed interest rate of (   ) to your standard variable rate, with immediate effect.

We understand the breakout cost is (€  ) and we enclose herewith a cheque in that amount.

Please confirm receipt of this letter and cheque and confirm that interest on our mortgage will be charged at your standard variable rate.

Yours sincerely   etc"

Kopkidda that is correct, assuming your general condition was worded in the same way ours is - I'd say they are standardised so it's probably the same.

Be careful if you ring AIB to check - when I rang I got a guy who pretty much told me that the cost would be such that there would be no benefit to moving, then told me that I should wait to see what they did with their interest rates.  It was only when I took out our offer letter and read the terms that I realised he was way off.  I think it was an innocent error but would have cost us a lot...


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## Senna (8 Nov 2008)

kopkidda said:


> Hi kate,
> 
> We fixed at 5.2%,the rate for 3 year fixed is still 5.2%,so going by your formula it should be free for us to change to a variable rate?



Is it not the difference between your current fixed rate and what the standard variable is.


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## brian1 (8 Nov 2008)

Senna said:


> Is it not the difference between your current fixed rate and what the standard variable is.


  I thought the same at first, but no it is the difference between fixed rates.  I'm currently going through the same process with AIB, as my fixed rate was 5.18%, there was no breakage fee


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## pepperds (18 Nov 2008)

we are 16 months into a three yr fixed mortgage at 5.15%, BOI today told me the fee would be €5k plus. The agent told me very quickly so it's obviously information they hold on the screen under your account.

Struggling to understand how this amount is so high given the same fixed mortgage is currently 5.2%.


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## NorfBank (18 Nov 2008)

How much is outstanding on the mortgage pepperds?


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## pepperds (18 Nov 2008)

around 400k...


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## cloughy (18 Nov 2008)

well if you are fixed at 5.15 and fixed rates falling, if new fixed for 1.5years was 4.5% (current variable) so probable lower then the cost to bank would be 

400k * 5.15-4.5% * 1.5years which would be 4k, thats how they would calculate the cost as they have hedged your fixed rate, so you can see how the cost could be 5k for another 1.5years.

also the fixed rate of 5.2% doesn't take account of latest 0.50% drop in AIB rates, know they reduced the variable not sure of impact on the fixed rates, and also you would be better looking at teh fixed rtae for 2yrs as thats what they would need to cover since 20months to go on yours.


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## pepperds (18 Nov 2008)

Got ya - I was reading the current fixed rate compared to ours, whereas the bank is hedging of course. Thanks for explanation, no complaints yet with our rate although anything lower is a benefit


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## NorfBank (18 Nov 2008)

The formula used by the banks is as follows:

Amt x (Rate on loan offer - rate available in market) x Time remaining in days

Divided by 36500.

So [€400000 (5.15 - 4.4%) x 600 days] / 36500

=> 400k x 0.75 x 6 / 365 = €4932

I have just assumed the rate available in market to be 4.4%. the bank will have the exact rate so this is where they get the €5k from.


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## pinkie123 (18 Nov 2008)

i took a fixed rate mortgage from BOI in july of 4.89% [2 yrs] on a 307k mortgage. 2 yr fixed today is 4.8%. From your calculation it will only cost me €5 euros to change??

307 X .09 X 5.8/365


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## Bronte (18 Nov 2008)

pinkie123 said:


> i took a fixed rate mortgage from BOI in july of 4.89% [2 yrs] on a 307k mortgage. 2 yr fixed today is 4.8%. From your calculation it will only cost me €5 euros to change??
> 
> 307 X .09 X 5.8/365


 Always get a written statement from the bank as to exactly what it will cost to change and even then make sure it's equal to what's in your terms and conditions, banks have been known to make errors, they can also be open to negotiation especially if you're on a compartively low rate versus current rates.


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## NorfBank (18 Nov 2008)

Unfortunately not, you don't use the current 2 year fixed (4.8%) as a reference point.  You would need to know the cost of refinancing your mortgage for the remaining part of the fixed rate period (Nov 2008 - July 2010) in order to calculate your penalty.

Assuming the rate is 4.4% then your penalty would be around €2390.

3070 x 0.49 x 580 / 365


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## pepperds (18 Nov 2008)

> Assuming the rate is 4.4%



Is this rate coming from the LIBOR rate that Banks borrow and lend at?


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## NorfBank (18 Nov 2008)

EURIBOR.

(LIBOR is the London Interbank Offered Rate)


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## pepperds (18 Nov 2008)

Great thanks - too much Sky News


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## Kate10 (18 Nov 2008)

Norfbank I'm not following you...when we broke out the formula was as follows:

rate at which we fixed less equivalent rate applicable on the day we broke out multiplied by remainder of fixed period.

We had fixed for 3 years so it was the difference between our fixed rate and the 3 year fixed rate available on the day we broke out.

If pinkie's bank had the same formula as AIB, then his breakout penalty would be approx €436 ...i.e.

307,000 X.09% X 1.58 = €436


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## shoppergal (18 Nov 2008)

gosh i just checked ptsb website for rates to see if this would be worth doing. they're quoting 6.25% for a 2 year fized. this is 1% higher than a year ago when we fixed. and i though rates were going down!!!


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## Senna (18 Nov 2008)

the forumla used here might be correct for some banks but not all.  some banks will charge a fee first then work out what it cost them for you to break the fixed term.  So it may cost them €500 but the fee could be €4000, so your cost to break is €4500.
I think EBS use this and others also.
Ask your bank for the info, they are the only one that can tell you, anyone on here is speculating and probably incorrect.


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## rmelly (18 Nov 2008)

shoppergal said:


> gosh i just checked ptsb website for rates to see if this would be worth doing. they're quoting 6.25% for a 2 year fized. this is 1% higher than a year ago when we fixed. and i though rates were going down!!!


 
Did you contact ptsb directly? Their website is quite poor in general, they seem slow to update it, so I wouldn't rely on the rates being the current ones.


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## NorfBank (19 Nov 2008)

PTSB 2 year fixed is 5.75%.


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## Nickbk1978 (19 Nov 2008)

NorfBank - You are incorrect in how you are calculating the penalty fee for breaking out oof an AIB fixed mortgage. They calculate the breakout cost against the current rate of the corresponding fixed rate product you are on.

ie if you are on a 3yr fixed rate mortgage at 5.0% and the current 3yr fixed rate mortgage is 5.2% then there is no charge to breakout, simple as that.

if you are on a 5 yr fixed rate mortgage at 5.2% and the current rate of the 5 yr fixed rate mortgage is 5.0% then you will pay whatever the reduction in your monthly payment would be by switching MULTIPLIED by the no. of months remaining on the fixed term.

I switched Monday and was on a 4.7% 2 yr fixed rate. There was no charge to get out of this as the current rate is 5.2% for a 2yr fixed rate product. I am now on the SVR of 4.5% and am hoping this will come down again by .5% in the next few months which would save me about 300 euros every month.


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## NorfBank (20 Nov 2008)

Nickbk1978 said:


> NorfBank - You are incorrect in how you are calculating the penalty fee for breaking out oof an AIB fixed mortgage.



Nickbk1978 - I didn't use that formula to calculate a breakage penalty for AIB. I was responding to pepperds and pinkie who both have mortgages at BOI. That calculation was in response to their queries. Apologies if this was unclear.

AIB do not use that formula as you and Kate10 have pointed out.


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## wallacek (16 Apr 2009)

I have a 3 year fixed morgage with Permanent tsb contacted them with regard to chaning to variable rate got a letter to state it would cost €5,600


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