Low Interest => Repay early?

M

MarkZ

Registered User
Messages
12
Hi,

Question1
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I have a tracker mortgage with AIB. Here's the last few months entries on the account.

12-06-08 Interest 2,483.97 198,505.90Dr
10-07-08 Payment DD 1,567.72 196,938.18Dr
16-07-08 New Rate 5.2% 196,938.18Dr
11-08-08 Payment DD 1,593.06 195,345.12Dr
10-09-08 Payment DD 1,593.06 193,752.06Dr
12-09-08 Interest 2,533.60 196,285.66Dr
10-10-08 Payment DD 1,593.06 194,692.60Dr
22-10-08 New Rate 4.7% 194,692.60Dr
10-11-08 Payment DD 1,542.68 193,149.92Dr
19-11-08 New Rate 4.2% 193,149.92Dr
10-12-08 Payment DD 1,494.84 191,655.08Dr
12-12-08 Interest 2,326.84 193,981.92Dr
17-12-08 New Rate 3.45% 193,981.92Dr
12-01-09 Payment DD 1,423.23 192,558.69Dr
28-01-09 New Rate 2.95% 192,558.69Dr

From this, what AIB appear to do is:

- every month I pay them by direct debit.
- this reduces the balance by the amount I pay.

10-07-08 Payment DD 1,567.72 196,938.18Dr
11-08-08 Payment DD 1,593.06 195,345.12Dr
10-09-08 Payment DD 1,593.06 193,752.06Dr
10-10-08 Payment DD 1,593.06 194,692.60Dr
10-11-08 Payment DD 1,542.68 193,149.92Dr
10-12-08 Payment DD 1,494.84 191,655.08Dr
12-01-09 Payment DD 1,423.23 192,558.69Dr

Then every three months they charge me interest:
- this increases the balance.

12-06-08 Interest 2,483.97 198,505.90Dr
12-09-08 Interest 2,533.60 196,285.66Dr
12-12-08 Interest 2,326.84 193,981.92Dr

So my question is that I figure the interest charged for any particular interest date should be:
- 3months/12months*rate*balance

Eg for the most recent payment it should be:
- 3/12*0.042*191655.08 = 2012.37

Instead it is:
- 2326.84

Perhaps you can't really treat mortgages as simply as I am doing here. Would anyone be able to help?

Question2
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I have paid money off this mortgage previously using a lump sum. When I did this I was asked - do you want the lump sum applied to the principle or to the interest.

My question is - given that interest rates are hitting historical lows, would it be wise to pay a lump sum against interest at this point of time.

Simplistically, say I have eurX interest to pay on this mortgage. eurX has come down a lot, so if I paid (hypothetically) 50% of eurX now then is that a good deal?

Again I may be simplifiying something that I need to be actuary to understand.

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Thank you,
MarkZ
 
Question 1:

There is nothing wrong with your logic, however the calculation is a little more involved. At a guess it is the interest rate used that is causing the problem.

I assume you have worked it out with the current (lower) interest rate. However, the daily interest applied (though only added every three months) is calculated based on the prevailing interest rate. During the three months the rate has gone from 5.2% to 4.7% to 4.2%.

Question 2:

Any lump sum payment should be against the principal. This will reduce your future interest amounts. You cannot pay off interest proportionately - i.e. paying off 50% of the interest now (and I'm not sure what that means) does not mean you would have halved your interest bill should interest rates rise.
 
Thank you for the response TaxiDriver - very enlightening.

Question1
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I understand now - I would need to calculate the interest for each individual day of the 3 month period.

Question2
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When paying off with a lump sum I was asked whether I wanted to pay off the capital (=> they said that this would reduce the amount of my payments each month) or whether I wanted to pay off the interest (=> they said that this would not reduce the monthy payment, but the term would reduce).

For me it meant by way of simple example:

You owe eur1000 over 10 years.
You pay eur10 per month.

Option1:
You reduce the capital to eur500 over 10 years.
=>You only pay eur5 per month, but over 10 years

Option2:
You reduce the term to eur1000 over 5 years.
=>You only pay eur10 per month, but over 5 years

In option 1 you are paying the capital early. In option 2 you are paying the interest early. IE the difference between "eur1000 over 10 years" and "eur1000 over 5 years" is 5 years of interest payments.

So given that interest payments are now historically low, would it be a good time to do an option 2 payment?
 
I don't think the bank gave you the best option i.e a combination of option 1 and 2 as described.

What you should do is pay the lump sum off the capital but keep your repayments the same thus reducing your term.
 
But would that mean that they would have to 'restructure' the mortgage forcing the customer out of the tracker and into variable?
 
No, I don't think it would MarkZ. You are simply reducing the capital, not changing anything else on the mortgage.
 
I have only see lenders try to restructure when a top up was being sought but check with AIB.
 
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