Planning to trade up - move to fixed rate on current mortgage?

Looking for some advice please.

We are currently on a 2.75% variable rate with AIB. Despite the ongoing and impending rate hikes, we hadn't yet taken up a fixed rate as we had planned to trade up this year and were hoping to fix our new mortgage. Unfortunately so far we haven't been able to find the right property, and at this point, it's hard to know how long the process will take.

With more rate rises on the way we're keen to avoid any unnecessary additional interest. I have seen here and elsewhere that break fees are usually quite low/non existent due to rising rates, and I'm wondering if it would be prudent/possible to consider moving to a fixed rate with AIB despite our plans to trade up in the short term.

Would it be likely that there would be significant penalties if, for example we fixed now and moved house (cleared this mortgage and started a new one) in 6 months?

Thanks in advance for any advice.

talofv said:

Would it be likely that there would be significant penalties if, for example we fixed now and moved house (cleared this mortgage and started a new one) in 6 months?

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@talofv Please provide the following information:

• Current lender: AIB
• Outstanding mortgage balance (how much you still owe)
• Approximate current value of your property
• The date you started your fixed-rate mortgage (month and year): N/A
• How many years you fixed for: N/A
• Your current mortgage interest rate: 2.75%
• Your current monthly repayment (excluding any overpayments)
• Your property's BER (Building Energy Rating) – check it here or estimate it if necessary

@Paul F might give you a more specific steer, but a couple of general thoughts that might help.

Generally speaking if you fix and rates go up you're right, there will be a low or no break fee, however if they then go below the rate at which you originally fixed though before you break you will be on the hook for a fee.

Broadly people should be careful about second guessing the direction of rates, which is kinda what you are doing here. The whole idea of fixing is to buy a kind of 'insurance policy' that stops your repayments getting out of hand based on the market for interest rates, but in this case your penalty might be substantial. So you are rolling a dice on interest rate fluctuations anyhow.

That said, if you fix for a short period this reduces the size of the potential break fee, AIB are one of the few lenders to do a 1 year fix so if you are really worried about repayments getting out of hand, it is an option.

Another option for people in this situation would be switching to an Avant Money or Finance Ireland long term fixed rate (15 years +), these mortgages have some flexibility for movers built in. So there may be no break fee involved if you fix and then move taking out the new mortgage with them.

Either way I'd have a chat to a broker, who has access to these lenders as they could advise on your individual case.

Thanks for the response @Mark Coan, very helpful. I'm not worried about repayments getting out of hand, we will be able to afford it, I just don't want to pay unnecessary additional interest if there's a way we can avoid it without penalty. Good point about Avant or FI too.

Perhaps there's no need to 'roll the dice' - it might be smarter to just suck up any potential increases in the short term and hopefully get an ok fixed rate on the new mortgage when the time comes (hopefully sooner rather than later).

For @Paul F:

• Current lender: AIB
• Outstanding mortgage balance:198k
• Approximate current value of your property: 600k
• The date you started your fixed-rate mortgage (month and year): N/A
• How many years you fixed for: N/A
• Your current mortgage interest rate: 2.75%
• Your current monthly repayment (excluding any overpayments):€1034
• Your property's BER (Building Energy Rating) – C1.

Thanks.

@talofv Finance Ireland's 10-year and longer fixed rates allow you to "take your mortgage with you" if you move home – meaning that you get to keep the same interest rate, and they will waive or refund any break fee. Unfortunately, if you switch to Finance Ireland now you will not eligible for this benefit because of the following condition:

• You must have been on the fixed rate for at least three years before moving home

Of course, there is nothing stopping you from taking out a mortgage with Finance Ireland when you do actually move home.

In theory you could switch to Avant now but the cost of doing so would more than wipe out any savings you would make if you were to move home within the next 12 months. And Avant don't allow you to "take your mortgage with you" when you move home.

That leaves the option of fixing with AIB.

• Switching immediately to AIB's 3-year fixed rate (2.35%) will save you about €770 over the next 12 months. And it is very simple and quick to do (no bank statements, salary cert or solicitor, etc., needed).
• This savings estimate uses for comparison the scenario of staying on the variable rate with AIB and assume that that rate doesn't change over the next 12 months (which is very unlikely). So in reality your savings will be higher than €770.
• And because of a quirk in how AIB calculate their break fees it is very likely that the break fee will be zero for the foreseeable future (see this thread)
  • N.B. In your case, the quirk only exists with the 3-year fixed rate. Edit: and also the 5-year fixed rate (also 2.35%), but not any others.

Here is AIB's mortgage amendment form if you decide to fix. Note that they have the right to apply any rate increases that they announce between the time you post the completed form to them and the time they actually process it – which is typically 2 weeks or a bit less. But those rate increases will probably apply to the variable rates too.

Paul F said:

@talofv Finance Ireland's 10-year and longer fixed rates allow you to "take your mortgage with you" if you move home – meaning that you get to keep the same interest rate, and they will waive or refund any break fee. Unfortunately, if you switch to Finance Ireland now you will not eligible for this benefit because of the following condition:

• You must have been on the fixed rate for at least three years before moving home

Of course, there is nothing stopping you from taking out a mortgage with Finance Ireland when you do actually move home.

In theory you could switch to Avant now but the cost of doing so would more than wipe out any savings you would make if you were to move home within the next 12 months. And Avant don't allow you to "take your mortgage with you" when you move home.

That leaves the option of fixing with AIB.

• Switching immediately to AIB's 3-year fixed rate (2.35%) will save you about €770 over the next 12 months. And it is very simple and quick to do (no bank statements, salary cert or solicitor, etc., needed).
• This savings estimate uses for comparison the scenario of staying on the variable rate with AIB and assume that that rate doesn't change over the next 12 months (which is very unlikely). So in reality your savings will be higher than €770.
• And because of a quirk in how AIB calculate their break fees it is very likely that the break fee will be zero for the foreseeable future (see this thread)
  • N.B. In your case, the quirk only exists with the 3-year fixed rate, not any others

Here is AIB's mortgage amendment form if you decide to fix. Note that they have the right to apply any rate increases that they announce between the time you post the completed form to them and the time they actually process it – which is typically 2 weeks or a bit less. But those rate increases will probably apply to the variable rates too.

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my understanding was that the quirk also is valid for the 5-year AIB rate?

Merowig said:

my understanding was that the quirk also is valid for the 5-year AIB rate?

Breaking out of a 5 fixed rate term and refixing for another 5 years. AIB Green 2.15%

Hi, i am wondering, given the recent mortgage rates hikes and inflation etc. If one is in a fixed rate with AIB 5 year fixed at 2.15%. Say you are 1 or 2 or 3 years into that rate, can you break out of it and refix again for another 5 years. To take advantage of the low rate on offer for...

www.askaboutmoney.com

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You're absolutely right – the same quirk exists with the 5-year rate (also 2.35%). I overlooked it.

But as a thought experiment, if AIB were to wrongly assume that @talofv was eligible for the 4-year fixed high-value rate (2.2%), they could face a future break fee if they fixed on the 5-year rate now. That is one reason to favour the 3-year fixed rate.

Thanks so much @Paul F, I really appreciate you looking into it. Seems like a no-brainer to switch to the 3-year fixed for now. Fingers crossed, we will have moved in the next 12 months, but even if we get somewhere in the next 6 months, we're still going to be better off.

I have a related question and might as well put it here rather than starting a new thread. We're aiming to sell and buy at the same time - am I right in thinking that we should be holding 10% of the price of the new house in cash, as we'll need to deposit this before we have the sale proceeds from our current house?

We do have enough cash to cover that, but I dislike having that much cash sitting around when it could be put to better use elsewhere. It might all be unnecessary in the end, as we're finding that being a chain buyer makes us less appealing, so we may need to look at an alternative approach.

talofv said:

I have a related question and might as well put it here rather than starting a new thread. We're aiming to sell and buy at the same time - am I right in thinking that we should be holding 10% of the price of the new house in cash, as we'll need to deposit this before we have the sale proceeds from our current house?

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I recommend you start a new thread. It's a different topic and it's likely that more people will pay attention to the new thread. And others with a similar question will find it more easily in the future.

Paul F said:

I recommend you start a new thread. It's a different topic and it's likely that more people will pay attention to the new thread. And others with a similar question will find it more easily in the future.

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Have posted in the Buying and Selling forum, thanks @Paul F

Moderator's note: the thread in question is here.

Paul F said:

You're absolutely right – the same quirk exists with the 5-year rate (also 2.35%). I overlooked it.

But as a thought experiment, if AIB were to wrongly assume that @talofv was eligible for the 4-year fixed high-value rate (2.2%), they could face a future break fee if they fixed on the 5-year rate now. That is one reason to favour the 3-year fixed rate.

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It is impossible to assume that wrongly as the minimum borrowing amount is 250,000 for the high value rate and the amount in question is 198k.
The 5 year rate is perfectly safe right now and likely more beneficial as a higher mortgage rate environment looks to be the new normal most likely

Merowig said:

It is impossible to assume that wrongly as the minimum borrowing amount is 250,000 for the high value rate and the amount in question is 198k.

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I fully agree, as long as AIB apply their own Ts&Cs correctly. If AIB were to make the mistake I hypothesised about, the customer would have to raise a complaint to get it sorted out.

Merowig said:

The 5 year rate is perfectly safe right now and likely more beneficial as a higher mortgage rate environment looks to be the new normal most likely

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The 5-year rate would indeed be more beneficial for most borrowers but @talofv intends to trade up within 12 months (if not sooner), and so the choice between the 3-year and the 5-year rate is pretty much moot in their case.

Paul F said:

You're absolutely right – the same quirk exists with the 5-year rate (also 2.35%). I overlooked it.

But as a thought experiment, if AIB were to wrongly assume that @talofv was eligible for the 4-year fixed high-value rate (2.2%), they could face a future break fee if they fixed on the 5-year rate now. That is one reason to favour the 3-year fixed rate.

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Take the 5 years. AIB is one of the better ones out there. See the extract below, point 2 and 3 from the regulatory information page. It plays into the favour of the borrower, in particular point 3 which state if there is more than one rate, they will take the one that cost the least. Example, as it is now, there are 2 types of 4 years rate. It is very unlikely that the standard 4 years LTV will drop below the 5 years LTV in the next while. Potential for break fee can be more or less ruled out when taking that into account.




• 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.

3. If there is more than one applicable fixed interest rate offered by the Bank at the time the ERC is being calculated, we will always use the fixed interest rate that generates the lower ERC in our calculations.

Paul F said:

I fully agree, as long as AIB apply their own Ts&Cs correctly. If AIB were to make the mistake I hypothesised about, the customer would have to raise a complaint to get it sorted out.


The 5-year rate would indeed be more beneficial for most borrowers but @talofv intends to trade up within 12 months (if not sooner), and so the choice between the 3-year and the 5-year rate is pretty much moot in their case.

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Life happens - personal situations can and do change and then someone in the market for trading up won’t get a mortgage for a new house. Or due to the very limited supply no house is still found which is desirable. The 5 years mortgage is a free hedge against that kind of scenarios.

Mark Coan said:

Broadly people should be careful about second guessing the direction of rates, which is kinda what you are doing here. The whole idea of fixing is to buy a kind of 'insurance policy' that stops your repayments getting out of hand based on the market for interest rates, but in this case your penalty might be substantial. So you are rolling a dice on interest rate fluctuations anyhow.

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This point is so important.

The point of fixing is not primarily to lower your costs, although that indeed is relevant. The point of fixing for a long time is to insure against a very large increase in rates that would put you under financial pressure. Some people need this, some people don't.

talofv said:

• Your current monthly repayment (excluding any overpayments):€1034

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When making the decision it all depends on what your income level is. If your monthly income is €10k I would say always take the cheapest fixed rate on offer at any point. If your monthly income is €3k I would say fix for long as a big increase in rates could really hurt.

There is natural penalty here. The poorer you are the more you need to fix but the more it costs you as a share of your income.

BigPineapple said:

3. If there is more than one applicable fixed interest rate offered by the Bank at the time the ERC is being calculated, we will always use the fixed interest rate that generates the lower ERC in our calculations.

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I forgot about this point!

@talofv As @Merowig and @BigPineapple point out, you might as well fix for 5 years instead of 3, and the chance of incurring a break fee when you sell remains extremely low.

As @Merowig says, the 5-year fix is like a free hedge in case you can't find a house to buy or you can't get a mortgage for some reason or you decide not to move after all.

Thanks everyone - your knowledge is invaluable! Will get on to this today, may already be a bit late depending on how quickly rates rise after the ECB decision, but it will still be the right course of action.

Definitely appreciate that 'life happens' - it has already thrown us a couple of curveballs. That said, I think that we're very unlikely to be in this house much past 12 months. Even if we haven't managed to complete a simultaneous sale & purchase, we might just move to a short term let next year, as we're finding that being 'ready to go' trumps everything in the current Dublin property market.