Key Post How to evaluate if it's worth fixing, switching or breaking out of a fixed rate

Almost every post on this topic is wrong. No matter how often it is pointed out, people look at the wrong figures. They use mortgage calculators when they don't need them. Most of the time, you can do the figures in your head.

Do not look at the monthly repayments – they are misleading.

Do not look at the savings over the remaining term of the mortgage – it too is misleading.

The main thing to look at is the difference in interest rates.

Example
You have a €200,000 mortgage with Bank of Ireland and it's coming to the end of the fixed rate, and the best rate available to you is 3 years at 3%

You can switch to Avant and fix for three years at 2%

The costs of switching are €1,000

Here is the correct calculation:
The annual reduction in mortgage rate is 1%
1% of €200,000 is €2,000
The cost of switching is €1,000
So for an upfront cost of €1,000, you will save €2,000 a year for three years.

It is actually that simple.


Moderator's note: consider posting your mortgage details in the switcher thread (in the format shown in the first post) – even if you are in the middle of a fixed rate. Someone will calculate an estimate of the break fee (if any) and of the savings you would make from switching to other lenders (or from re-fixing with your current lender). Even if your mortgage is with Ulster Bank, you can still re-fix with them. Re-fixing with your current lender is simpler and usually quicker than switching to another lender.

The exact same methodology applies to evaluating whether you should break out of a fixed rate.

Breaking out of a fixed rate to fix again with the same bank is a form of switching. You are paying a break fee instead of the legal costs of switching lender.

Let's say you have €100k fixed at 4% with 3 years remaining.
You have been quoted a break fee of €1,200
The current 3 year fixed rate for the lender is 3%.

Annual reduction in mortgage rate: 1%
1% of €100k is €1,000 (It will be a little bit less because you are repaying capital, but it's not material.)

So it will cost you €1,200 up front to save €1,000 a year for three years.

This is a good example of why looking at repayments is wrong.
The difference in repayments is only €50 a month.
So, you could easily (but wrongly) conclude: It's not worth paying €1,200 up front to save just €600 a year.

Why you should never look at repayments

Take the example of €200,000 @ 3% over 20 years vs. €200,000 @2% over 20 years.

Repayment on €200k @ 3% over 20 years: €1,109 per month or €39,900 over three years
Repayments on €200k @2% over 20 years: €101 per month or €36,396 over three years
So the saving appears to be only €3,500

But we see that the interest saving is actually nearly €6,000!

Because of the way mortgage payments are calculated, when the interest rate is lower, you pay more off the capital.

So with the Avant mortgage not only will your repayments be €3,500 lower, but at the end of the three years you will have paid off €2,500 more capital than BoI.

So only ever look at the interest charged.

If you use a repayment calculator, you will overlook the increased repayment of capital.

Why you should never look at the savings over the remaining term of the mortgage

You are not making a decision to switch to Avant for the next 25 years.

BoI might be 1% dearer today, but they could actually be cheaper after the 3 years fixed rate is up and you might switch again or you might switch to AIB.

If you are comparing fixed rates over the same period, it's reasonable to look at the savings over that period.

Another reason is that very few mortgages last their full term.

• You might trade up and that will require you to redeem your mortgage
• Even if you don't trade up, you might increase your monthly repayments or pay a lump sum off the capital.

So keep your mortgage under continuous review and do the calculations based on a relatively short horizon of one to three years or the term you intend fixing for.

How to evaluate variable rates

This is a bit theoretical in today's market where fixed rates are much lower than variable rates.

I will complete this section when it becomes relevant again.

Other considerations

I can't put it any better than Sarenco's comment in this post

Where it's a relatively close call, I would be inclined to opt for the lender that has demonstrated an intention to compete on rates alone.

Click to expand...

Let's say you do your calculations and you factor in Bank of Ireland's 3% cash back, and that works out cheaper over three years than Avant Money.

But what happens at the end of 3 years?

Bank of Ireland still has thousands of customers paying 4.5% SVR because BoI has not reduced the SVR in years and many customers are too busy or too poorly informed to do anything about it.

By comparison, AIB has reduced their SVR to 3.15%. So if you are a very busy or very poorly informed AIB customer, you are paying 3.15% at most.

Avant Money seems committed to competing on mortgage rates without using cash back gimmicks to attract new customers. Their highest rate is 2.75%

And it's not just about being too busy or too poorly informed. There are other reasons which might deter you from switching:

• You might fully intend to switch to the best deal when the fixed rate ends in three years,but what if you lose your job, change job or have a bad credit record? You won't be able to switch lender. You will not want to be a prisoner of Bank of Ireland or ptsb at that stage.
• And at a certain stage when your mortgage is paid down to below €100k, it takes longer for the savings in mortgage rates to cover the costs of switching. So you probably won't bother. At that stage you will be glad to be a customer of the likes of AIB or Avant who compete on rates rather than on gimmicks.
• See this post for a list of other reasons why you may not be able to switch to another lender

Before switching, consider if it's possible to pay down your mortgage to bring you into a lower LTV band

Get your home valued and when you know the value, work out what loan-to-value (LTV) band you will be in. If you have the cash, pay down your mortgage before you switch to take advantage of the lower band.

For example, say your mortgage balance is €324k and you get a property valuation of €400k (ideally from the lender you are planning to switch to). Your LTV ratio is 324k/400k = 81%. If you make a lump sum overpayment of €4,000, your mortgage balance will be €320k and your LTV ratio will be 320k/400k = 80%. You will then be eligible for lower interest rates (because you will be in the "<80% LTV band").

Brendan Burgess said:

Because of the way mortgage payments are calculated, when the interest rate is lower, you pay more off the capital .

So with the Avant mortgage not only will your repayments be €3,500 lower, but at the end of the three years, you will have paid off €2,500 more capital than BoI.

Click to expand...

This is relevant, but I am not sure it is material if you have no need to sell.

In the example you give the difference between a 2% and a 3% rate at the half-way point of the mortgage is an outstanding balance of 110k and 115k respectively.

This gives you a bit more equity, which is good, but it's hardly a game changer and it falls the closer you get to term. You are not going to be mortgage-free any sooner.

For most people the monthly differences between the new and old rate is the thing to focus on.

Hi Coyote

I don't know where to start.

The whole point is that you should not be looking at the full term of the mortgage. You should not be looking at the half term of the mortgage.

You are not making a decision today to which you will be tied in for 20 years.

You should look at where you will be in one year or three years, if you fix for three years.

I will try to explain it in a different way.

The logic of what you are saying is "Forget about the interest rate and just look at the repayments"

So Avant says that the monthly repayments are €1,011

But BoI says that with them the monthly repayments will be €843.

Great - So BoI is better. All the other stuff about mortgage balance is irrelevant.

But with BoI I used a higher mortgage rate but increased the term by 10 years.

I repeat: When comparing mortgages, you should look at the mortgage rate and never look at the repayment.

Of course, you must also factor in cash back and initial fees.

@Brendan Burgess

Thanks, conscious of your other post, I am not being argumentative for its own sake.

It's mechanical that an interest rate differential reduces the interest you pay to a greater extent when you have more principal outstanding. Having less equity outstanding is also useful if you wish to sell. There is no disagreement.

But there will always be a highest and a lowest fixed rate on the market for a given term. The best you can ever do is switch from the highest to lowest. And what you achieve is the monthly saving at any point in time.

So I just think the short-term cash flow benefits of switching are the most relevant for most people. Households just don't have to think in balance sheet terms like firms do.

NoRegretsCoyote said:

Having less equity outstanding is also useful if you wish to sell.

Click to expand...

I hate saying it so directly, but you are completely wrong.

It has nothing to do with selling.

After three years, you will owe €2,500 less on your mortgage. That is real cash. It's not some notional balance sheet figure.

At the end of the three years, your repayments will be less because your mortgage is €2,500 lower.
If you switch to another lender, you will be borrowing less.
And, yes, if you sell your house, you will have €2,500 more cash after doing so.

Brendan

Brendan Burgess said:

After three years, you will owe €2,500 less on your mortgage. That is real cash. It's not some notional balance sheet figure.

Click to expand...

It's not real cash! Both the value of your house and the balance outstanding are pretty notional to most people. You can't eat the equity in your house!

Unless you are trying to reduce your term or sell your house, what matters is the monthly mortgage payment.

None of this should distract from the fact that switching to Avant is a great deal for a lot of people

NoRegretsCoyote said:

Both the value of your house and the balance outstanding are pretty notional to most people.

Click to expand...

Hi Coyote

I am trying to understand why you don't get this. I think you are extending a correct point about the "notional" value of a property incorrectly to the hard balance of a mortgage.

Let's say you have a mortgage of €100k on a property worth €300k. (The property value is irrelevant to this exercise)

The bank says to you: Thank you for being a loyal customer, we are writing down the balance of your mortgage by €3k. What do you say. Don't bother, it's theoretical?

Or they say to you. We have had a bad year, so we are increasing your mortgage balance by €3k. You say : "Fine, it's of no concern to me as I don't intend to sell my house." ?

Believe me, it's real money.

I will try another approach.

You take out a 20 year mortgage.
The bank gives you two options: Interest only or full capital and interest.
According to your logic you should pick the interest only as the capital balance on the mortgage is irrelevant.

Brendan

@Brendan Burgess

I am not saying they are irrelevant, I am saying that they are not material on a day-to-day basis.

Imagine your bank wrote and said: "Due to our error your mortgage balance has increased by €3k. The monthly mortgage payments will remain the same however for the remainder of the term".

You'd probably be annoyed but it would have zero impact on your other day-to-day spending and investment decisions. Same if they had decreased the balance by a relatively small amount.

Believe me I aggressively chase every saving on my mortgage that I can get. But this is just to save money. I have no plans to move even in the medium term so relatively small changes in my home equity aren't material.

I’m currently with PTSB SVR @ 3.75%. Am I right in saying if I switch to Avant and avail of the 3 yr fixed at 1.95% on a mortgage of €250,00, the saving is €13,500?

3.75% - 1.95% = 1.8%
250,000 @ 1.8% = €4,500 per year
x 3 years = €13,500

Knock off a small bit as you will owe a bit less than €250k in the second and third years, but a saving of €13k is about right.

And it's likely that at the end of three years, Avant will probably be cheaper than ptsb.

Brendan

Brendan Burgess said:

Example
You have a €200,000 mortgage with Bank of Ireland and it's coming to the end of the fixed rate, and the best rate available to you is 3 years at 3%

You can switch to Avant and fix for three years at 2%

The costs of switching are €1,000

Here is the correct calculation :
The annual reduction in mortgage rate is 1%
1% of €200,000 is €2,000
The cost of switching is €1,000
So for an upfront cost of €1,000, you will save €2,000 a year for three years.

It is actually that simple.

Click to expand...

Thanks for this Brendan, it’s really simple and helpful. The only challenge I would have on it is the assumed €1k cost of switching. I’m looking into switching to Avant and got a couple of quotes from solicitors. Inclusive of VAT and other fees/outlays I was quoted about €1500-€1900.

I’ve been reading around a lot of the other posts looking for real examples of where people managed to limit their legal fees to about €1k all-in, but haven’t found much. Grateful if anyone could point me in the direction of a solicitor who will do it at this cost. I’m based in South Dublin. Thanks.

Hi Polka Dot

I have started a Key Post here

I am on a fixed rate of 2.55% (lowest with current provider), 30 months of fixed period remaining, balance of €190,000, 60-70% LTV, breakage fee €0.

If I switch to Avant this is what I come up with:

2.55% - 2.10% = 0.45%
€190,000 @ 0.45% = €855 per year
x 3 years = €2,565

Are these figures correct?

Valuation has already been paid. If I add approx. €1,400 in solicitor fees all in, would you switch now and try to move to the lower 1.95% when possible or would you hold for another while, then try to do the switch to the lower 1.95% directly (if still available)?

EDIT: When I check in bonkers.ie I get a different figure for savings over the fixed period. I'd appreciate if someone could explain the discrepancy and tell me which is the correct one. Or am I comparing pears and apples?

@Brendan Burgess

Does your method still work if switchers are looking to keep their monthly payments the same and reduce the term instead? I don't understand why people are always focusing on lower monthly repayments when they would save more money in the long run by lowering interest rates but keeping the monthly payments the same.

I give up.

Read the first post.

Ignore the monthly payments and look only at the interest rates.

Brendan