Aib break cost - to proceed or not? Thoughts welcome

B

BigBoots82

Registered User
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Evening all

I currently have a mortgage with AIB fixed of c200k for 6 years at a rate of 3.5%.

AIB has informed me that I will incur a break cost of 3400 if I move to the 5 year 2.85% fixed rate. This break cost must be settled up front.

I think by back of an envelope calc. I could save between 5k and 6k (undiscounted) over the next 5 years by switching.

The upfront hit to cash flow is nasty though. Not much free cash flow left if took the hit. My question to you is would you do it if you were me?
 
There's a way around it. Break, pay the fee, and take a 3 month repayment moratorium.
Or, switch to another lender, get a better rate and cash back which will cover the break fee.
 
RedOnion. Option 2 is not an option in this case due to separate loan with AIB. Whats the 3 month moratorium point? Be interested in hearing more about same
 
a moratorium is taking a break from repayments, it'd help with your cashflow. AIB tend to be flexible with it once you're not in arrears.
NOTE: this may affect your ability to switch to another lender, as you've taken a payment break (although agreed).
You are also repaying the missed payments over the remaining term, so it will cost you more in interest.
 
Thanks. In this case I dont think thats an option I personally would pursue.

On an overall basis would you take the hit today for a future saving over 5 years?
 
If I were in you boots (couldn't resist), yes I would. You're saving close to 3,000 in interest net, after paying the break fee.
 
Thanks Red. Ordinarily I'd rather go bootless in the snow than take an up front hit but I think on this occasion I may be snookered
 
Update. When i did a detailed calculation on a month by month basis it turned out we'd only save c.900 over 5 years. We are not going ahead with same as a result
 
Brendan Burgess said:
Hi Zenith

Look at the interest charged and not the repayments.

The reduction in interest is 0.39% (2.99% - 2.6%)
So the annual savings in interest are €416k @0.39% or €1,600
The savings over two years are €3,200

As the savings exceed the break-fee of €1,305, then it is worth breaking and re-fixing

Brendan
Click to expand...

Thanks Brendan. The above is what I was doing initially. Taking headline figure and calculating interest differential on an annual basis. This doesnt take account of the fact however the balance is decreasing each month? Least to me it doesnt
 
OK, I just glanced at your figures. Here is the actual calculation I would do.



Mortgage amount: €200k
Interest rate saving : 0.65%
Annual saving: €1,300
Break fee: €3,400
Time taken to save break fee: 2 years and 8 months

BigBoots82 said:
we'd only save c.900 over 5 years
Click to expand...

Brendan Burgess said:
Annual saving: €1,300
Break fee: €3,400
Click to expand...

5 years at €1,300 = €6,500

So it looks like the saving over 5 years is €3,100

Have I done the calculation incorrectly?

So it seems worth doing.

Or switch to Ulster Bank @2.3% fixed for two years
Mortgage amount: €200k
Interest rate saving : 1.2%
Annual saving: €2,400
Break fee: €3,400
Legal fees covered by €1,500 paid by Ulster Bank
Time taken to save break fee: 1 year and 6 months

Or switch to BoI/EBS
Get 2% or €4,000 cash up front.
But savings not as good.


BigBoots82 said:
This doesnt take account of the fact however the balance is decreasing each month?
Click to expand...

This is not material. The balance will be reducing whichever way you go.

Brendan
 
@BigBoots82
How many years are left in total on the mortgage? I think you might be comparing the total repayments instead of the pure interest savings.
If the interest rate is lower, you are repaying more capital, so at the end of 5 year you'll have a slightly lower balance outstanding.
 
RedOnion said:
@BigBoots82
How many years are left in total on the mortgage? I think you might be comparing the total repayments instead of the pure interest savings.
If the interest rate is lower, you are repaying more capital, so at the end of 5 year you'll have a slightly lower balance outstanding.
Click to expand...
All things being equal I would agree but AIB reduce the repayment amount on the lower rate fixed loan so you repay the same amount of capital and it takes you same length of time to repay in full. 24 years left in term
 
Bigboots,

I know we're using round figures here. 200k for 24 years. I've used an annuity curve calculation to be more accurate an factor in the reducing balance (but it's not material).

At 3.5%, repayment is 1,027 per month.
At 2.85%, repayment is 960 per month.

You've obviously got that bit.

However, at 3.5%, at the end of 5 years the remaining balance will be 170,926
At 2.85% the balance in 5 years would be 168,790

So, in addition to saving (1027-960)*60 = 4020 in repayments over 4 years, your balance is also going to be 2,136 lower, so the total saving is 6,156 (less your break fee).
 
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