Cashback offers

[gsecoo]

Hi All,

Looking for some opinions here. I am currently at loan offer stage with BOI and weighing up whether or not I should go with their cashback offer.

I am buying an A rated house so I can avail of their cheapest green rate mortgage offers. I'm borrowing €477,000 over 35 years. BOI are offering 2% cashback so €9,500 cashback at draw down.

Our broker had suggested fixing for one year @ 4.3% with repayments of €2,198 per month and getting the cashback versus fixing for 4 years @ 3.6% with repayments of €1,999 per month.

So there would be around €7,000 cashback accounting for the higher monthly repayments. Our broker reckoned after the 1 year fixed that we would probably be able to then fix for 3.6% or lower. I know that is all crystal ball stuff and hearing this week that there might not be as many rate cuts this year as anticipated.

I'd like to hear some thoughts.

Thanks in advance
G

 

[_OkGo_]

So there would be around €7,000 cashback accounting for the higher monthly repayments

This is not correct, don't confuse the monthly payment (cashflow) with the cost of your loan (interest)

For simplicity, it is easier to assume the balance is constant. All you need to do is compare the % interest.

In option 2, you pay 4 x 3.6% = 14.4% over 4 years

In option 1, you pay 4.3% - 2% in year 1. That means that an interest rate of 4.03% for years 2-4 would leave you in the same position (total of 14.4%) at the end of the of year 4.

So really it comes down to how confident you are that you will be able to fix for less than 4% at the end of year 1?

 

[gsecoo]

This is not correct, don't confuse the monthly payment (cashflow) with the cost of your loan (interest)

For simplicity, it is easier to assume the balance is constant. All you need to do is compare the % interest.

In option 2, you pay 4 x 3.6% = 14.4% over 4 years

In option 1, you pay 4.3% - 2% in year 1. That means that an interest rate of 4.03% for years 2-4 would leave you in the same position (total of 14.4%) at the end of the of year 4.

So really it comes down to how confident you are that you will be able to fix for less than 4% at the end of year 1?

Thank you for the reply, that's why I asked here. I knew someone would explain it

I suppose that is part of my question too. What do people on here reckon are the chances of rates being the same next year or lower. The 2% cashback would be great if I was able to fix at a lower rate after the first year.

 

[_OkGo_]

What do people on here reckon are the chances of rates being the same next year or lower.

I know that is all crystal ball stuff

You've answered that one yourself

It all depends on your own personal situation and how capable you are to deal with rate increases. You have a 35 year mortgage so you are obviously early 30's. You are borrowing 477k so your income is at least ~€120k.

If you are stretched to the max (4x LTI) then I would lean more to certainty. If you are on a higher income and have borrowed only what you needed (e.g. LTI of <3) then you can probably tolerate the risk of a higher rate.

In our own case (~7 years ago), we switched a couple of times when we first drew down and then finally fixed at the lowest and longest (5 year AIB 2.15%) once child ~1 arrived. We wanted the certainty of a constant mortgage payment before we added creche fees to the mix.

If kids aren't immediately on the horizon and your income is €160+, I would take the cashback now and be prepared to switch lender at the end of year 1 as there could still be other cashback offers available with with the possibilty of lower fixed rates too.

 

[jim]

Thank you for the reply, that's why I asked here. I knew someone would explain it

I suppose that is part of my question too. What do people on here reckon are the chances of rates being the same next year or lower. The 2% cashback would be great if I was able to fix at a lower rate after the first year.

Saying as you asked. Lower. All logic point to it. Theyve been high for yrs and have started to come down. In fact im certain theyll be lower.