Paying off mortgage faster, and having a fixed or variable rate

W

whytis

Registered User
Messages
56
Hello there,

my long-term strategy is to pay off our mortgage faster than our agreed term.

I prefer having a fixed rate of interest.

During our fixed rate, our mortgage bank have twice agreed to out of course payments on the principal without penalties or breakage costs. However, I can't rely on that in the future, as it's at their discretion.

In general a fixed rate of interest is incompatible with paying off a mortgage more quickly, correct?

The options I see:

* Request a restructuring of the mortgage from a 30-year to a 15-year (I don't know of the technicalities involved, perhaps it's straight-forward enough)
* Fix for 5 years, save up in the meantime. Lapse onto a variable rate, pay extra on the principal, and fix again for several years.
* Another option I'm not seeing?

I've about 30 years left on a 35-year mortgage. Currently on a fixed rate, due to expire in 2 years. I think it would only make sense to change the length of our mortgage agreement when this fixed rate has ended, to avoid breakage costs.

Whytis.
 
Why do you favour a fixed rate?

For someone like yourself who can afford to overpay, a variable rate is much more attractive.

When your fix expires, move to a SVR.
Leave the term as is.
Then pay off amounts as it suits you.

This way, if your situation ever changes, you can revert to the lower payments.

Brendan
 
Brendan, I like your straight-forward solution :)

The reasons for liking fixed are all about reducing the potential impact of increasing rates over time. It's all hypothetical, and I don't know if you allow this on the forum. But if our rate just happened to be 8% in 5 years' time, our over-payment would grind to a halt.

Edit: The reason for the reduced term would be to make it automatic that we pay-off earlier. It does increase the risk of not being able to pay, with the monthly payment getting higher. I guess the compromise is staying on our current term, and acting intentionally on paying it off early.
 
Would you fix a portion and leave a portion variable? Then you can pay off the variable part early.
 
A fixed rate is basically a "premium" product, you pay for the privilege of a assured rate for a period of time. As you already know, over-paying when on a fixed rate is generally limited or attracts penalties. Banks will always try to cost in some market uncertainty to the rate, so the rate they quote can be thoght of as a rough guide to their guess at how rates will vary. Interest rates can (and certainly at the moment) will go up so it becomes a choice between a limited certainty and the constraints that brings or the facility to overpay when you want to. Bear in mind that as the principle reduces so will the actual amount of interest and this will ameliorate rate rises. If you want to accelerate your repayment it is simpler and cheaper to do so with a variable rate (even excluding penalties).
 
The comment about the fixed rates is true in a normal market. Ireland is not a normal market. Right now the 2 year fixed rate is lower than the SVR with BOI. For a short period the 3 rate was also lower, and just before the last rate increase was announced, the 5 yr rate was lower than what the new SVR was going to be.

I know if I had my pick of any type of mortgage, it'd be one of the US style 30 year fixed mortgages that allow over payment and re-financing. Unfortunately I don't think we'll ever get rates that low.
 
Thanks to all, I appreciate it.

At the risk of complicating my mortgage, I like @ClairM's suggestion of splitting between fixed and variable. We would over-pay on the variable rate part, while fixing for 5 years, for example.

@so-crates Thanks, that all makes sense, and going with a variable rate.

@ryaner I hear you. I was reading American sources, and they were talking about fixing for the full term and paying off early as you have the money. However, what's the conclusion of your comment about the nature of fixed rates in Ireland at the moment?
 
ryaner was pointing out that what I said is normally true (that fixed rates are usually more expensive and attract a higher rate than the variable) however currently in Ireland there are people paying a fixed rate mortgage who are paying a lower rate than the variable rate at the same bank.
 
I would forget about the fixed rate and overpay by as much as you want each month. If it gets to the point that interest rates are so high that you can't overpay anymore, than so be it. You'll already have paid off extra capital, and can resume doing so if interest rates drop again.
 
Mrs Vimes said:
Hardly news to anyone any more that banks mis-priced the risk!
Click to expand...

Depending on who you talk to they may not be doing that. Having people on a fixed rate means they are likely to keep paying the mortgage at least for the term of the fixed rate. The banks have wanted to keep up their extend and pretend stuff until the economy kicks off again.
 
You must log in or register to reply here.
Back
Top