Breaking a fixed rate mortgage

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Bronte

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There seems to be a lot of confusion about breaking out of a fixed rate mortgage. I've checked the key posts but I don't see anything about this. Would anyone know what the current standard penalty is for breaking a fixed rate mortgage? The figures seem astronomical to me nearly 20K in many cases. Is this becase the mortgage amounts are so high or have the penalties increased?
 
Some lenders charge a flat fee (around 6 months repayments) while other use the following formula.

In the case of the early repayment of a fixed rate loan the banks use the following formula to calculate whether there is a penalty and the size of that penalty.
(Amount x (R - R1) x Time) divided by 36500.
Amount = Mortgage outstanding
R = Costs of funds for the bank for the fixed rate period (i.e the rate on your loan offer)
R1 = Interest rate available to the bank for funds placed on date of early repayment.
Time = Number of days between date of early repayment and en of fixed rate period.

Trying to put this as simply as possible:

Banks make money, if you are on a high fixed rate relative to prevailing interest rates they will charge you a penalty for coming off it, if you are on a relatively low rate they will be happy for you to pay it back so they can lend it elsewhere at a higher rate.
 
Thanks Norbank, I always thought it was about 6 months interest and prior to this it used to be 3 months interest. Are you saying it can be 6 months payments and not 6 months interest?

In relation to your calculation could you show a real example say a normal mortgage (300K?) over normal term (30 years) we're in say year 2 and it's fixed at 6% for 5 years when current variable is 3%. I'm sorry maths is not my strong point.
 
In simple terms the breakage clause will generally charge you the full value savings you expect to make by switching over the remaining term
 
Bronte said:
Are you saying it can be 6 months payments and not 6 months interest?

In relation to your calculation could you show a real example say a normal mortgage (300K?) over normal term (30 years) we're in say year 2 and it's fixed at 6% for 5 years when current variable is 3%. I'm sorry maths is not my strong point.
Click to expand...

Sorry I meant interest repayments but this differs from bank to bank.

Example:

Mortgage amount x [ 6 (fixed rate) - 4 (this figure is the unknown and only the banks have it. I am assuming 4%)] x (3 years in days)

Above divided by 36500.

=> 300000 x 2 x 1095 / 36500 = €18000 breakage fee.
 
Thanks Norfbank,

Another question do not most banks have the rule as you state but it's the lesser of the two, as in it's either the interest for 6 months or the calculation you made but whichever is the least cost for the borrower?

Also this figure of - 4 that only the banks have, how would a customer be ever in advance be able to calculate the penalty if they cannot know this figure?
 
Bronte said:
Thanks Norfbank,

Another question do not most banks have the rule as you state but it's the lesser of the two, as in it's either the interest for 6 months or the calculation you made but whichever is the least cost for the borrower?

Also this figure of - 4 that only the banks have, how would a customer be ever in advance be able to calculate the penalty if they cannot know this figure?
Click to expand...

In practice it should be close to the banks current fixed rate (corresponding to your term remaining). Recently, however, many banks are not quoting competitively so it will be closer to the most competitive fixed rate currently on the market rather than their own.
 
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