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With the Irish retail banks commencing their mortgage rate increases in recent times, it is noted that Bank of Ireland has been sending out letters to customers (including myself) who’s fixed rate expires later in 2022. The correspondence is offering customers the ability to fix for up to 5 years at 2.9%-3% and for 10 years at 3.3%.
The question posed is whether to fix for 1, 2, 3 or 5 years as the rate is about the same. A factor in the decision making is potentially a sale of the property in the next few years potentially. If in a fixed term at that point, a breakage fee will apply per the bank’s criteria. The key component of the calculation appears to be inter-bank interest rates. As I understand it, as inter-bank interest rates rise, the break fee falls.
So for those of us who are considering perhaps fixing for 3 or 5 years but possibly selling before that, a measure of crystal ball gazing is needed.
Below seems to be the position but if anyone else is considering the tenure of fixing in the coming weeks, your thoughts welcomed.
The key components of Bank of Ireland’s break fee calculation appear to be R% and R1%.
R% in their calculation seems to be the rate which was the cost of funds at the time for Bank of Ireland when the mortgage holder decides to fix. This is moving up but is close to zero still as I understand that Bank of Ireland issue bonds in the covered bond market which are AAA rated so funding cost must be close to zero. When you look at their interim report for FY22 at https://investorrelations.bankofireland.com/app/uploads/Interim-Report-HoldCo-2022-Web.pdf it would seem from The Net Interest Income Note on page 8 that their average cost of funding group-wide is close to slightly below zero.
R1% in their calculation seems to be the rate available to them for a deposit of an amount equivalent to the mortgage principal presumably at the date of break-out of fixed rate mortgage in the future. I assume the deposit rate has been zero or less over the last number of years but is on the rise and next year and thereafter will increase over zero as ECB base rates rise.
So, I infer from above (if indeed correct) that if one breaks from a Bank of Ireland fixed rate in 2023-2025, there should be no break fee? This is on the basis that R% is effectively close to zero now and the expectation is that R1% must be higher than R% in the future as ECB rates rise. So R% minus R1% would give you a negative % and therefore the formula results in a nil fee.
Not sure if all of the above makes sense to others but any comments/observations welcomed.
With the Irish retail banks commencing their mortgage rate increases in recent times, it is noted that Bank of Ireland has been sending out letters to customers (including myself) who’s fixed rate expires later in 2022. The correspondence is offering customers the ability to fix for up to 5 years at 2.9%-3% and for 10 years at 3.3%.
The question posed is whether to fix for 1, 2, 3 or 5 years as the rate is about the same. A factor in the decision making is potentially a sale of the property in the next few years potentially. If in a fixed term at that point, a breakage fee will apply per the bank’s criteria. The key component of the calculation appears to be inter-bank interest rates. As I understand it, as inter-bank interest rates rise, the break fee falls.
So for those of us who are considering perhaps fixing for 3 or 5 years but possibly selling before that, a measure of crystal ball gazing is needed.
Below seems to be the position but if anyone else is considering the tenure of fixing in the coming weeks, your thoughts welcomed.
The key components of Bank of Ireland’s break fee calculation appear to be R% and R1%.
R% in their calculation seems to be the rate which was the cost of funds at the time for Bank of Ireland when the mortgage holder decides to fix. This is moving up but is close to zero still as I understand that Bank of Ireland issue bonds in the covered bond market which are AAA rated so funding cost must be close to zero. When you look at their interim report for FY22 at https://investorrelations.bankofireland.com/app/uploads/Interim-Report-HoldCo-2022-Web.pdf it would seem from The Net Interest Income Note on page 8 that their average cost of funding group-wide is close to slightly below zero.
R1% in their calculation seems to be the rate available to them for a deposit of an amount equivalent to the mortgage principal presumably at the date of break-out of fixed rate mortgage in the future. I assume the deposit rate has been zero or less over the last number of years but is on the rise and next year and thereafter will increase over zero as ECB base rates rise.
So, I infer from above (if indeed correct) that if one breaks from a Bank of Ireland fixed rate in 2023-2025, there should be no break fee? This is on the basis that R% is effectively close to zero now and the expectation is that R1% must be higher than R% in the future as ECB rates rise. So R% minus R1% would give you a negative % and therefore the formula results in a nil fee.
Not sure if all of the above makes sense to others but any comments/observations welcomed.
