Fixed or Variable with lump sum?

[Pneuma]

Hi all,

I'm in the process of buying a house. I am taking out a mortgage with AIB as it seems Brendan highly rates them! I will be in the 50 to 80% LTV band, so have the choice of variable at 3.95% or 5 year fixed green at 3.55%. I saw another thread here posted by RedOnion which explained that with AIB you dont incurr any charge if you make overpayments on a fixed mortgage as the newer fixed rates are lower than the existing ones. Currently AIB's 5 year fixed green is their lowest rate.

My situation is this. I have another property I will be selling when I get this house and my intention is to put the proceeds in to the mortgage. My intention is to do this sooner rather than later. Obviously I would prefer the lower rate. However am I at risk that AIB could reduce their fixed rates further and I would then incurr a penalty to pay a lump sum off the principle? Would you guys recommend I go with the fixed or variable rate given my circumstance? Thanks!

 

[BigPineapple]

I saw another thread here posted by RedOnion which explained that with AIB you dont incurr any charge if you make overpayments on a fixed mortgage as the newer fixed rates are lower than the existing ones.

This is probably what you are referring to that AIB brought in in 2023, that you can overpay 5K worth per year on fixed rate.

https://aib.ie/help-and-guidance/mortgages-faq/can-i-make-an-overpayment-on-mortgage-repayments

But since you mentioned about selling current house and using the proceed to pay off (which I assumed would be more than 5K), it seems like you might be referring to this earlier thread below. You need to read the below post in its entirety. From memory, the "don't incur charge" aspect is applicable when your current fixed rate is lower than your future fixed rate, not the other way around (This is related to the D% parameter in the calculation). So if you anticipate a rate drop in the near future, it looks like you may be charged (After the 5K per year limit of course).

https://www.askaboutmoney.com/threa...n-5yr-fixed-rate-and-some-other-rates.222401/

An alternative that might be worth considering doing is a split mortgage, part variable and part fixed. The variable part you can choose a value that would be near equivalent to "monthly repayment" (enough up to the time that anticipate that you will make the lump sum) plus the lump sum. Obviously the shorter time you are on variable the better since the rate is higher compared to fixed.

Two additional benefits of doing split mortgage to consider. You can convert the variable one to fixed at any time. Assuming you are applying the mortgage with two person on the application), after you have the mortgage up and running, change one of the account payer to your husband/wife/partner. Now both of you will enjoy free banking instead of one.

 

[Pneuma]

Thanks BigPineapple. How likely is it that AIB's fixed rates will drop below the 5 year fixed green rate?

If I took out the 5 year fixed green mortgage today, and had a lump some to pay off in 3 months time, would AIB be comparing my rate to their 4 year fixed rate? Or would they still be comparing it to a 5 year fixed rate? The 4 year fixed rate is 4.75% and I assume they would be unlikely to drop that below 3.55% in the next year.

 

[BigPineapple]

It is hard to know really regarding rate drop.. I can't really comment on that..

With respect to taking out 5 years fixed rate today and pay lump sum in 3 months.. they would give you either of the benefit of 5 years fixed rate or 4 years fixed rate (whichever is more beneficial to you).

You can see below from AIB's Regulatory Information page where that is taken from, the two clauses I highlighted. (I wished they would use an example that is not bang smack in the middle for clarity but anyway, I digressed)

Clause 3 to my understanding (open to correction) is that you are not restricted to just the Green fixed rate, you can also compare to a normal fixed rate from AIB with the same remaining year. In most cases Green fixed is probably already the best of them but it is still good to know they use the one that is most beneficial to you (i.e. they are not trying to screw you over)

https://aib.ie/our-products/mortgages/Home-Mortgages-Regulatory-Information

 

[_OkGo_]

To put some numbers on your situation, you are borrowing 50-80% and your rebuild is €1.1m so let's assume property value of €1.5 - €2m.

You are borrowing anything from €550k - €1.6m. To have complete flexibility, you can choose variable which is costing you a premium of 0.4% or 0.033% per month. For each month you delay between drawing down and selling your other property it will cost you €183 - 533 in additional interest per month. So while not ideal, it won't be too costly either.

Home-Mortgages-Regulatory-Information

aib.ie

Additional information regarding the calculation
We take a number of other factors into account as described below. These will result in a lower ERC than if we did not take these into account. For example:
1. We consider the reducing balance nature of your mortgage, which will mean that your ERC will be less than the indicative figure produced by the A x U X D% formula.
2. When the remaining term does not exactly match a term for which there is a rate available, we will use the two closest rates and apply the most beneficial to you. For example, if you have 18 months remaining on your fixed term, we will use the more beneficial of the 12 and 24 month rates in our calculations.

Point 2 above from AIB's t&c's confirms that you will be compared to both the 4 & 5 year rates and the most beneficial to you will be used.

I can't see the 4 year dropping below 3.55% that quickly so I would see it as a safe bet to fix at the 5 year green rate.

A further thought is that if rates do drop, it will likely be incremental. I don't think rate drops are automatically applied to existing fixed rates so you should remember to re-fix or restart your 5 year green every time there is a drop in rates. You will always be compared to the more favourable shorter (4yr, 3yr) so I can't see an ERC being applied.

You will get the benefit of dropping rates and a new extended 5 year term

 

[Pneuma]

Thanks very much BigPineapple and OKGo!! That looks really promising. However, I phoned the AIB mortgage advisor today and was told "there's penalties if you fix, not if you're variable". I pressed the issue a bit and they eventually gave me the number for the team who supposedly calculate the penalties. I phoned them and the woman I spoke to told me that I would be compared to the fixed term I initially signed up for. I asked the question multiple times and even gave the example of...if I fix for 5 years green rate and after 4 years I want to pay a lump sum, am I compared to the current 1 year fixed or is it the 5 year fixed green? She was determined that I would be locked in to comparisons with the 5 year fixed green. Looking at their own example that you have shown here that seems wrong. I really don't know.

I have spoken to AIB a few times throughout this process on some pretty basic stuff and they have never been able to give me a proper answer to anything. For example, I had been under the impression that I couldn't get a mortgage on land in excess of the 1 acre curtilage. I spoke to my mortgage advisor who told me there was no issue, I could buy a house in the middle of a field and pay for it all with a mortgage. Great I thought, and started planning accordingly. Soon as the valuation was completed on the house I found I get a message to say no mortgage for over 1 acre so I have to pony up the cash for the rest. Very frustrating. They also struggled to explain the delayed start moritorium that they offer. One guy seemed to think it would save me interest (the opposite is true). I dunno, maybe they're not used to people asking stupid/awkward questions but I think some training is in order!

BTW OKGo I am not buying a 2m euro house!! Hence my surprise at the 1.1m rebuild cost...

 

[_OkGo_]

However, I phoned the AIB mortgage advisor today and was told "there's penalties if you fix, not if you're variable". I pressed the issue a bit and they eventually gave me the number for the team who supposedly calculate the penalties. I phoned them and the woman I spoke to told me that I would be compared to the fixed term I initially signed up for. I asked the question multiple times and even gave the example of...if I fix for 5 years green rate and after 4 years I want to pay a lump sum, am I compared to the current 1 year fixed or is it the 5 year fixed green? She was determined that I would be locked in to comparisons with the 5 year fixed green. Looking at their own example that you have shown here that seems wrong. I really don't know.

I can understand your concerns as to who to believe, the AIB mortgage advisor or a randomer on the internet

But in all seriousness, I've had to explain this to them myself when making overpayments (I'm on the 2.15% green still). I've been told to wait for a break fee calculation before transferring funds because they simply don't understand their own T&C's

Ultimately it is your money and decision so I would suggest reading your Letter of Offer and all T&C's again and make your own conclusion.

If you are in any doubt then go variable and fix as soon as you make lump sum. It won't cost you that much in the greater scheme of things to do this

 

[Pneuma]

I can understand your concerns as to who to believe, the AIB mortgage advisor or a randomer on the internet

But in all seriousness, I've had to explain this to them myself when making overpayments (I'm on the 2.15% green still). I've been told to wait for a break fee calculation before transferring funds because they simply don't understand their own T&C's

Ultimately it is your money and decision so I would suggest reading your Letter of Offer and all T&C's again and make your own conclusion.

If you are in any doubt then go variable and fix as soon as you make lump sum. It won't cost you that much in the greater scheme of things to do this

I have far more faith in randomers on the internet than the crowd in AIB! That's interesting that you have been in the same position. I'm gonna crunch the numbers again in the morning and might send AIB the query again in writing to see what the say. My prediction is "we can only calculate the break fee when the lump sum is requested" for the 10th time. There must be just one lad in there that can actually do the calculation, and a team of people to put people off doing it! 2.15%! How long ago was that??

 

[_OkGo_]

This was previously my thread on the same topic. We switched to AIB in Feb/Mar 2021

Overpayment / re-fix flexibility of AIB's green 5yr fixed rate (and some other rates)

Moderator's note: Because of a quirk in how AIB calculate their break fee / early redemption charge, you can make unlimited overpayments on some of their fixed rates without penalty. Or you can break out of your existing AIB fixed rate and re-fix on a different rate, again without penalty. (You...

www.askaboutmoney.com

If you read the first page or 2, you'll also see we re fixed in May/June 2022 to effectively reset the clock (post #20). I don't remember exactly but I think we did it again in September/October 2022 before rates began to rise.

We've also been overpaying regularly since then with no break fee.

The more I think about it, it is more important to you that you make sure you refix every time there is a rate change. It will save you a lot more money over the long term vs your current dilemma.

 

[BigPineapple]

I have far more faith in randomers on the internet than the crowd in AIB! That's interesting that you have been in the same position. I'm gonna crunch the numbers again in the morning and might send AIB the query again in writing to see what the say. My prediction is "we can only calculate the break fee when the lump sum is requested" for the 10th time. There must be just one lad in there that can actually do the calculation, and a team of people to put people off doing it! 2.15%! How long ago was that??

The most important part is if you do your calculation per the Regulatory Information sheet guideline/formula and the numbers work out to 0 or negative, you don't have to pay when doing the overpayment on fixed rate. AIB have to follow the same rules.

You have many examples of calculations from the previous discussion thread already mentioned above by individuals with AIB mortgage. As long as you are following along the steps and the figure works out, you will be fine.. Also remember AIB give you different ways to calculate and give you the most beneficial one, if the main formula didn't yield the required result, you have different calculation option.

**Important to note the distinction that Early Repayment Charge (ERC) does not mean you break out of the fixed contract. It is simply the charge to overpay early if applicable. (e.g. you are starting 2nd year from a 5 years fixed green rate and you want to overpay, the clock on the 5 years fixed rate doesn't restart). Anyway it is just for clarity in case you are not aware.

 

[Pneuma]

From reading the other thread(didnt realise this was going on so long), and seeing your responses to this thread, I can't help but think that AIB deliberately lied to me. I find it very hard to believe that someone who works on the team that calculates ERC fees wouldn't have an understanding of the concept. Also it seems that others have had a very similar experience with them.

If AIB were to drop there 5 year fixed green rate would I then face ERC fees? @_OkGo_ how could I refix if AIB dropped their rates? Would that not entail a break fee?

Another question. If my lump payment changed the LTV to <50% (which is currently 3.45%) would that change the outcome of the calculation?

My last mortgage I just stayed Variable the whole time because I knew I would pay it off sooner. Was very handy just using the app to may additional payments. Seems if you fix you have to fill out forms and wait for responses my mail?

 

[BigPineapple]

I can't help but think that AIB deliberately lied to me. I find it very hard to believe that someone who works on the team that calculates ERC fees wouldn't have an understanding of the concept. Also it seems that others have had a very similar experience with them.

Probably more so being incompetent than lied..

I will be in the 50 to 80% LTV band, so have the choice of variable at 3.95% or 5 year fixed green at 3.55%.

If AIB were to drop there 5 year fixed green rate would I then face ERC fees? @_OkGo_ how could I refix if AIB dropped their rates? Would that not entail a break fee?

The gist of how this will work is that you're on the 5 years green rate which will be the lowest of all the 5 years fixed rate AIB offer currently when compared (Even the 1, 2, 3 or 4 years fixed rate are all higher than the 5 years green fixed rate [at the time of writing]).

If there is a drop in the fixed rate, depending on the remaining years you have left to run, as long as the new rate won't be less than 3.55% you will be OK. It is very unlikely the new rate will be less than 3.55% because if you look at the table below, currently the difference to the next closest fixed rate is the 1 year fixed rate at 4.55% and that has a 1% difference. I would think banks would not drop 1% in one go plus in your actual real life case, you're probably going to be in between 4-5 years. So the difference there is 1.20% to 1.25%. I think we can safely say that you will be grand.

So using Clause 3 mentioned previously, the first part is working out your ERC for cross checking. If you plug in the formula from the regulatory information sheet, the D% parameter will always be negative (e.g. 3.55%-4.80% = -1.25% if you have between 4-5 years left OR another example, 3.55% - 4.55% = -1.00% if you have between 0-1 year left).

As you can see, when you multiply the whole lot out by a negative number, you get a negative figure but since the Bank is not going to pay you, therefore you're effectively getting 0 ERC.

Once you determined the ERC is 0, you break the 5 years green fixed rate contract you have currently and re-sign again for another 5 years green fixed rate thus effectively reset the clock and get the new lower fixed rate.

Another question. If my lump payment changed the LTV to <50% (which is currently 3.45%) would that change the outcome of the calculation?

I can foresee that you will need to get your new valuation done by AIB approved valuer beforehand. Once you have that done, using the above mentioned method, your ERC will be 0 as already demonstrated. Therefore you can break the 5 years green fixed rate contract you have currently and re-sign again for another 5 years green fixed rate with the new LTV band thus effectively reset the clock and get the new lower fixed rate.

 

[Pneuma]

Thanks very much @BigPineapple!

I don't understand how I would be able to refix the 5 year green without a break fee if the rates drop as would that not mean that there is a lower rate that they can compare me to?

 

[BigPineapple]

I don't understand how I would be able to refix the 5 year green without a break fee if the rates drop as would that not mean that there is a lower rate that they can compare me to?

As I have said, in your case you will be fixed on 3.55% now and if you look at the current rate from the table (depending on when you do this, year wise) it will range from 1 to 5 years but 1 to 5 years have a range difference of 1% to 1.25% respectively when compared to 3.55%.

I think we can agree in general, it is very very unlikely that the bank will do a rate drop bigger than 1% in one go, they will probably do like a 0.25% drop or 0.5% drop.. therefore whatever rate they drop to, as long as it is not less than 3.55% you have fixed at, then D% parameter from the formula will always be a negative value. Ergo, 0 ERC = no break fees.

 

[_OkGo_]

I don't understand how I would be able to refix the 5 year green without a break fee if the rates drop as would that not mean that there is a lower rate that they can compare me to?

To refix on a new 5 year term, you are essentially requesting to move your entire balance to a new mortgage rate so the ERC will be calculated on your remaining balance.

If you draw down today and decide to refix next week, AIB will compare you to both the 5 year and 4 year rates. So even if there was a big drop in rates, I personally don't see a drop of >1% happening in one go.

But even if it did, it becomes a different question to ask yourself... should I pay a small ERC to save a lot of money over 5 years.

Using the rate table above from @BigPineapple , you can fix today at 3.55% and the 4 year rate is 4.75%. If AIB announced major rate cuts in 3 months of 2.55% green 5 year and 3.25% on the 4 year rate.

In this hypothetical scenario, you would face an ERC of (3.55-3.25) x 4.75yr or 1.425%. But it would absolutely be the right thing to do be because you would be saving 5% (3.55-2.55) over 5 years.

Ultimately you need to be comfortable with the numbers and your own understanding of the numbers but I think it is fairly safe to fix now for 5 years.

My last mortgage I just stayed Variable the whole time because I knew I would pay it off sooner. Was very handy just using the app to may additional payments. Seems if you fix you have to fill out forms and wait for responses my mail?

All of our overpayments have been by transfer on the app. For the first overpayment, I sent a small amount and 2 weeks later received a letter confirming the new monthly payment and that a zero ERC applied. Basically I wanted to check that the default was to reduce the monthly payment and maintain the term. Since then we've increased how much has been overpaid without any issue.

The only time I would request the ERC is when you want to refix the rate (if it drops). Just to be sure you don't get any surprises. And you do need to fill in a form to refix but it is very simple and well worth doing if it save a few percentage points on your mortgage

 

[Pneuma]

Thanks @BigPineapple and @_OkGo_ . I didn't seem to get notifications of your new posts, or at least didn't notice them.

I phoned AIB again on Monday to try to get them to confirm what you're saying (not that I don't believe you! I'm just baffled that the bank can't answer the question). Spoke to 2 different women who both conceded that they didn't know. Was then put through to an answering machine that said for all early repayment queries I need to talk to the the mortgage advisor in my local branch. Called in yesterday and the mortgage advisor said she didn't know how it worked ("there's a formula") and I should email AIB and ask. So I think I've exhausted that avenue...

Do the ERC numbers in the below table look right? Effectively, if all rates drop but their standard fixed rates are higher than my rate there is no ERC. If the standard fix rates drop below my rate the ERC considers the applicable standard rate (not the even lower Green rate)

One thing I wonder is, could AIB come along and say that as I'm on the Green rate, the other rates aren't "applicable" as per clause 3 referenced above? Or is applicability purely related to period remaining?

 

[BigPineapple]

("there's a formula")

The formula is the Regulatory Information Sheet, they can't deviate from that. They 'could' revise it but I would expect that they will notify their customer if it happens.

Do the ERC numbers in the below table look right? Effectively, if all rates drop but their standard fixed rates are higher than my rate there is no ERC. If the standard fix rates drop below my rate the ERC considers the applicable standard rate (not the even lower Green rate)

Your scenario 1, 2 and 3 looks OK.

Going by one of the AIB example (Extract below), your scenario 4 should be:
A=100,000
U=54/12
D=3.55-3.20

This works out to: [(100,000) x (54/12) x (3.55-3.20)]/100 = 1,575

Going by one of the AIB example (Extract below), your scenario 5 should be:
A=100,000
U=54/12
D=3.55-3.10

This works out to: [(100,000) x (54/12) x (3.55-3.10)]/100 = 2,025

So yes it matches.

Side note: See the below after the calculation, they say they also compare to market interest rate. I don't know how that works (in terms of market interest rate) but it is an additional calculation. Nonetheless, they will always give you the most beneficial one to you so it shouldn't go any higher than those you have calculated as minimum.

Example 1: You fix your mortgage loan at a fixed interest rate of 5.25% for a period of 5 years (60 months). After 3 years (36 months), you repay your mortgage loan in full. The outstanding amount on your mortgage loan at that time is €100,000. The applicable fixed interest rate used is the 2 year fixed interest rate being offered by the Bank as there is still 2 years (24 months) remaining on your original fixed term, e.g. 3.0%. In this case, ERC = (A= €100,000) x (U = 24 months /12) x (D% = 5.25%-3.0%= 2.25%) = €4,500.

We will also use a market interest rate to calculate the D% component in the formula above. In that case, D% would be the difference between the market interest rate applicable at the start of the fixed interest rate term, and the market interest rate applicable at the time of the early repayment or conversion, for the unexpired fixed interest rate term. Note: Market interest rate is determined by the wholesale market. The market interest rates used will be as of close of business on the previous working day to the day the calculation is being completed.

As for the below

One thing I wonder is, could AIB come along and say that as I'm on the Green rate, the other rates aren't "applicable" as per clause 3 referenced above? Or is applicability purely related to period remaining?

I would have thought it is related to period remaining because all the examples from the regulatory information sheet only looked at the years remaining (They don't specify the type such as Green or not).. but now that you questioned it, I'm not 100% sure, there is an ambiguity alright. You're better off sending them an email to them with scenario 4 or 5 and see what they confirm for you figure wise. Then you will know for sure what is "applicable".