Breaking out of a fixed rate mortgage

[Brendan Burgess]

This has come up on Askaboutmoney before, so I want to develop a systematic approach to making the decision. It is a little bit more complicated than this, but this format will allow most people do their own rough calculation.

I appreciate that with much higher standard variable rates prevailing now, it is much less likely to be attractive, but the issue does still occasionally arise and probably will again in the future.

Lender| Ulster Bank
Mortgage amount | €600,000
Fixed rate |5%
Fixed rate period left| 2 years
Variable rate proposed| 4%
Break fee quoted|€7k

Simple calculation – if interest rates stay the same
Maximum potential saving:
€12,000 (600,000 @1% for two years)


The saving will be reduced by the interest on the fee
€560 (interest on fee €7,000@4% for two years)

If interest rates rise, the savings will be lower
If you paid a break fee of €7,000 now and Ulster Bank raised the variable interest rate to 5% tomorrow, you would lose €7,000 by breaking out.

If variable interest rates fall, the savings will be higher
This is not expected as of the time of writing July 2010


Reasons for switching to a variable rate
To pay a lump sum off your mortgage.
- make overpayments
- redeem mortgage early
- reduce term


Further reading
Breaking out of a Fixed Rate contract – a long thread from early 2009 detailing people’s experiences and a similar thread

This is a practical thread. If you want to debate the issues of whether or not people should be charged breakage fees, do so in this thread

 

[Brendan Burgess]

Some tips if you are considering switching


Don’t switch if your mortgage contract allows you to switch to a tracker on expiry of the fixed rate
Some mortgages allow you to switch to a tracker rate on expiry of the fixed rate. This is a very valuable asset and you should only switch out of a fixed rate if they are agreeing to switch you to a tracker rate. Check your loan offer.

Check your contract to see how the break fee is calculated
was quoted €11,500 to break out of a fixed rate. He checked his contract to find that the price was the lower of 6 months interest or €6,600. So he corrected the bank and ended up paying only €6,600

You may be able to pay small lump sums off your fixed rate without penalty
Some lenders allow borrowers to pay up to 5% a year off their fixed rate mortgages without penalty. If you can, you probably should do this before breaking the fixed rate as it will reduce the break fee.

 

[Brendan Burgess]

FAQ (to be completed)

I don’t want to break the fix, how else can I reduce my repayments?


How is the Break Fee calculated?

Can we appeal the fee if it’s too high?


Why do some lenders not charge a break fee?


Will they add the fee to the mortgage or do I have to pay it in cash?

 

[Brendan Burgess]

Has the Ombudsman ruled on many of these cases?

They did refer the issue to the Financial Regulator according to Niall Brady

[broken link removed]

 

[Brendan Burgess]

Rescheduling an expensive fixed rate mortgage
If you can't meet your monthly repayments, the bank will probably switch you to interest only or they might even give you a moratorium.

But don't forget that the relatively high interest is sill being charged on the mortgage even if you are not currently servicing it.

Of course, it's the very opposite for cheap trackers. If you have a cheap tracker the banks lose money by reducing your capital repayments.

 

[NorfBank]

SHOULD I COME OFF A FIXED RATE MORTGAGE?

You need to ask yourself the following.


1) Will there be a penalty for breaking the fixed rate mortgage?

In the case of the early repayment of a fixed rate loan some banks use the following formula to calculate whether their in 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 in the money market on date of early repayment.
Time = Number of days between date of early repayment and en of fixed rate period.

Banks are here to 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.

Other banks charge a fixed fee or say 6 months interest payments - check with your lender.

2) Why did I fix in the first place?

The main reason most people fix is so that they know exactly what their mortgage repayments will be for a certain fixed period. It gives them certainty and helps them to budget. If this is the reason you went on the fixed rate and if you are comfortably making the repayments then my advice to you would be to stick to the fixed rate.
If you fixed just to time the market and think you got it wrong then you might get it wrong again.

3) Will there be other fees involved in switching?

Some lenders will charge an administration fee to switch between fixed and variable. If you are switching lenders to avail of a better tracker rate then there will be legalfee of around €1000.

4) Can I afford to switch lenders?

Is your LTV low enough to switch lenders since the recent falls in house prices?
Some lenders still allow a 92% switch but on average it is around 80%.

5) Are variable rates really that good?

This is the most important issue after the penalty fee.
Could you see variable rates go higher than the fixed rate you come off?

6) Are there fees to switch? i.e valuation and legal fees - these could add up to around €1000

[broken link removed]