Switching & lump sum payment - best approach?

[Honestly]

Hi

I have €328k remaining on a mortgage over 29 years with EBS at a fixed rate of 3.2% interest. I pay €1416 a month on mortgage and life insurance (bundled together with EBS). I've read the switcher advice threads (so great, requested ICB statement and asked my solicitor for a quote to switch). However I am considering paying a lump sum (€50k, half of my savings) and want to increase my monthly repayments to €2k a month.

My goal is to pay off the mortgage in the fastest sustainable way.

Would be grateful for any guidance about what the smart approach is here, or what order of operations changes given these circumstance.

Thanks in advance.

 

[HollowKnight]

Get quote for break fee from EBS first.

 

[Honestly]

Thank you, that's helpful. I am actually on a fixed rate of 3%, not 3.2%.
I just got my annual statement and I pay 1400ish monthly, and get charged 800ish a month interest. Really would love to make a smart choice on this so value any feedback.

 

[PGF2016]

Organize a mortgage for €278k with the bank you are switching to. When your solicitor is redeeming the current mortgage s/he will pay €278k + your €50k + break fee to EBS.

How quickly you can pay off the new mortgage depends on the terms of that mortgage i.e. how much the bank will allow you to overpay without penalty and of course the term of the mortgage.

 

[Honestly]

So I would pay the 50k to EBS who I am with now so that the loan that is transferring is the 278k. That helps/makes sense.

Looking online, I see some five year fixed rate at 2.5%. Is this because my LTV is lower?

Should I put my property value at the price I paid (375k in July 2019) or the value of the most recent that a house in this estate sold for (415k, same condition as my home, November 2019), or is this where I need to get a property evaluation done. And in that vein, is a higher property value resulting in a lower LTV in my interest?

Lastly, it looks like with a five year fixed rate of 2.5% I would be decreasing my monthly payments from 1400ish to 1100ish over a 30 year term. But if I reduce that to a 20 year term, I can comfortably afford to pay 1500 ish, which feels really good (shorter mortgage, amount I can afford). I am thinking that it's better to have a higher monthly repayment rate that I can comfortably afford, than pushing it to 15 years (1900ish, which I could pay but wouldnt be saving monthly), and to reassess in five years when the fixed term is up, on doing higher payments (I should have a higher income by then).

Your help on this is really appreciated.

 

[Honestly]

From EBS:

No breakage fees whatsoever at the moment for lump sum payments.
To answer your question if you switched provider today there is no penalty (for the next 5 working days) but this could change.

This holds for the next 5 working days.
Going to ask if they'd consider lowering my interest rate themselves. Not even sure if that's a thing they do, but no harm to ask.

 

[RedOnion]

Going to ask if they'd consider lowering my interest rate themselves. Not even sure if that's a thing they do, but no harm to ask

Yes, if there's no break fee you should be able to break & refix at their current rates. But the rates are 2.9%

One feature of EBS mortgages is that you can ask them to shorten the term so that you are overpaying, but there i no break fee for doing so.

 

[Coldwarrior]

Lastly, it looks like with a five year fixed rate of 2.5% I would be decreasing my monthly payments from 1400ish to 1100ish over a 30 year term. But if I reduce that to a 20 year term, I can comfortably afford to pay 1500 ish, which feels really good (shorter mortgage, amount I can afford). I am thinking that it's better to have a higher monthly repayment rate that I can comfortably afford, than pushing it to 15 years (1900ish, which I could pay but wouldnt be saving monthly), and to reassess in five years when the fixed term is up, on doing higher payments (I should have a higher income by then).

Keep the term as long as possible, and go with a lender that allows penalty free overpayments on a good fixed rate, overpaying up to whatever the payment would have been on the shorter term. Ulster Bank were a great option for this, KBC also allow it and I believe Avant do too but only up to 1% of the balance ( I could be wrong on that). This way your contractual minimum payment is kept low, which would be a big help in case you were to go through a period of financial distress (lost job, serious illness etc), while allowing you to still pay off the mortgage early.

 

[_OkGo_]

I am thinking that it's better to have a higher monthly repayment rate that I can comfortably afford, than pushing it to 15 years (1900ish, which I could pay but wouldnt be saving monthly), and to reassess in five years when the fixed term is up, on doing higher payments (I should have a higher income by then).

This is the wrong way to look at it. Reducing the term reduces your options and flexibility. You should maintain your term length but plan to overpay in regular lumpsums. There is a good chance that a certain % of overpayment is allowed depending on who you switch to and there is also a good chance that no (or a very small) break fee applies.

By the way, you should be getting 3/5 year rates of 2.2-2.35% with an LTV of <80%. Try the CCPC calculator

In your example, you are increasing your payment by €300/month by reducing the term. If instead you choose to maintain the term, you can overpay yourself by €300/m as long as no break fees apply. Worst case scenario is that immediately after you fix for 3 years, there is a change to wholesale rates and a break fee applies, you could retain the €300/m and make a €10.8k lump sum as soon as the fixed period ends. The cost to you in this scenario is the loss of compound interest saving during that 3 years. €300/m for 36 months at 2.2% totals €11154 so it costs you €354 to hold on to that €10,800 in overpayments

To put it in perspective, if you choose the 2.5% rate instead of the 2.2%, you will be paying 0.3% extra interest on the total balance of €278k. This 0.3% is €834 of additional interest for each year so €3300 in additional interest over 3 years.

So do you want to pay €3.3k extra in interest or take the very small risk that you cost yourself €354 by retaining the lumpsum overpayment?

It is smart to overpay your mortgage and keep the term length for flexibility. You don't mention a spouse so if you are the sole owner and all expenses are paid by you, then having that €10k available to you could cover a few months of mortgage payments if you lost your job or changed employment and take time between roles. Basically it gives you a little breathing space

Edit: Compound figure adjusted for monthly compounding

 

[Honestly]

Thanks mate. I am in the fortunate position of having an oh-$hit fund separate to my potential 50k lump sum deposit but that is sound advice either way.

I am wondering if now is a good time to do this, in terms of both Ulster Bank leaving Ireland and covid. I understand that the main thing that is important is to pay it down as early as possible and I've already spent months not making a call here, but any suggestions / advice would be helpful

 

[Honestly]

Just one final sanity check before I make my lump sum payment, my ESB advisor said the following:

If it is not one of these ( term or payment ) the amount will sit as a credit in your mortgage account.
Will this work for you and of course it will come off the final figure if you switch.
Or you can cancel your dd mandate and the monthly repayment will come out of the lump sum.
Just to confirm there is no penalty for this.
No problem HonestlyTho it will stay on your mortgage as a credit unless you tell us to do otherwise.

So I am paying 50k off the mortgage (which is a payment that sits in credit) and if I switch, that will go off the mortgage.
I am not changing my repayment term (29 of 30 years left) or monthly amount / method.

Or do I want to pay it off the term or something else? I am always worried I am missing a beat with these things.

Hoping to sort this week so thoughts appreciated.

 

[Honestly]

The more I read that the more I think I am supposed to be paying it off the term, ie the total mortgage, and not just giving EBS 50k to sit there for the good of my health? Agh.

 

[Honestly]

I asked the EBS mortgage advisor and they said

Technically yes the lump sum sits as a credit in your mortgage so if you went to pay it off in the morning the balance is Eur 277,293 etc.

it is semantics really HonestlyTho.

You can make the payments as normal month to month in the meantime.

but when I challenged that the interest I will pay is on 277k not 327k, he said he had to check.

Sorry for the running commentary.

 

[Itchy]

Should I put my property value at the price I paid (375k in July 2019) or the value of the most recent that a house in this estate sold for (415k, same condition as my home, November 2019), or is this where I need to get a property evaluation done. And in that vein, is a higher property value resulting in a lower LTV in my interest?

Your mortgage will be 278 after you pay off the 50k. your LTV will be 278/415= 66% and you have capacity to overpay. There is a good chance that your property value is north of that now. You are close to 60% LTV which may mean you could apply to Avant for a 1.95% rate. Or failing that there is a 2.1% rate where you could drop down when you hit the LTV.

 

[Honestly]

Thanks, finally doing the work now to switch. Gonna post in the switcher thread for guidance tho will put it here too (copied below). To follow up, I overpaid 50k with no penalty, fairly easily.

Property is definitely 400k, if not 410k. My understanding is that as part of switching, the bank will send out someone to evaluate. I tried to get it done independently so I'd have an idea of value, but apparently that's not the done thing

Just following up, my solicitor said:

I confirm you can work off the legal costs for the mortgage transaction at €1,650 to include our fees, vat and outlays such as Land Registry fees and searches etc in this case and hope this helps.

Based on the switcher thread it looks like the fee should be closer to 1300, and given he's the solicitor who helped my purchase I dont know why he'd be re-doing land registry searches again? I wonder can I just haggle him down?

Looks like I can switch with Doddle to Avant for a 2.1% fixed rate, which is my preference, but seeking guidance in switcher thread and welcome it here too.

• Current lender: EBS
• Outstanding mortgage balance: 267,000
• Approximate value of your property: 400,000
• The date you started your fixed-rate mortgage: July 2019
• How many years you fixed for: 3
• Your current mortgage interest rate: 3%
• Your current monthly repayment (excluding any overpayments): €1416
• Your property's BER (Building Energy Rating) - no idea, but getting it assessed soon I hope, probably not 'green'
• Are you due to get extra cashback from your current lender in the future, e.g., "1% after 5 years", or "2% cashback monthly"? If so, how much and when? - 1% or 3,300 ish in 2024

I am set on switching - just trying to pick the smartest choice. My fixed rate ends in June anyway. My LTV is ~66% so definitely better rates I can get out there.

Should I decrease the payment term to match my existing monthly repayments? I currently comfortably pay 1400 per month on my mortgage, and would like to sometimes be able to overpay (bonuses etc). Avant allows 10% overpayment a year which is fine (26k), and I understand I can pay a fee to overpay if I wanted to go beyond 10%. But if I stick to my current mortgage terms (27 years, fixed rate of 2.1%) my repayments would drop to ~1100 a month. It looks like if I took a 20 year term my repayments would be €1,357.04 + life insurance, which would come in around the same. I dont see any huge risk in this (ie I can comfortable repay that monthly, plus overpay sometimes). Is this a reasonable approach for me to take?

Solicitor fees: My solicitor quoted me €1600 to switch. I've reached out to Doddle. Do I need both a broker and a solicitor? I think yes. Solicitor to deal with banks, broker to deal with Avant?

Life Insurance, I went with life insurance with EBS because it was easiest. It was a bit of a faff because I am fat, which is discriminatory, but I digress. If I am switching can I keep my life insurance with them to save the hassle of dealing with all of that again?

Fixed term period; any guidance on whether to pick 3 - 4 - 5 - 10 year terms?

 

[Honestly]

This is the wrong way to look at it. Reducing the term reduces your options and flexibility. You should maintain your term length but plan to overpay in regular lumpsums. There is a good chance that a certain % of overpayment is allowed depending on who you switch to and there is also a good chance that no (or a very small) break fee applies.

By the way, you should be getting 3/5 year rates of 2.2-2.35% with an LTV of <80%. Try the CCPC calculator

In your example, you are increasing your payment by €300/month by reducing the term. If instead you choose to maintain the term, you can overpay yourself by €300/m as long as no break fees apply. Worst case scenario is that immediately after you fix for 3 years, there is a change to wholesale rates and a break fee applies, you could retain the €300/m and make a €10.8k lump sum as soon as the fixed period ends. The cost to you in this scenario is the loss of compound interest saving during that 3 years. €300/m for 36 months at 2.2% totals €11154 so it costs you €354 to hold on to that €10,800 in overpayments

To put it in perspective, if you choose the 2.5% rate instead of the 2.2%, you will be paying 0.3% extra interest on the total balance of €278k. This 0.3% is €834 of additional interest for each year so €3300 in additional interest over 3 years.

So do you want to pay €3.3k extra in interest or take the very small risk that you cost yourself €354 by retaining the lumpsum overpayment?

It is smart to overpay your mortgage and keep the term length for flexibility. You don't mention a spouse so if you are the sole owner and all expenses are paid by you, then having that €10k available to you could cover a few months of mortgage payments if you lost your job or changed employment and take time between roles. Basically it gives you a little breathing space

Edit: Compound figure adjusted for monthly compounding

Hey - I know it's a year later, but just wanted to thank you for this guidance. I've done enough reading/learning now that it makes sense as the best approach and I appreciate your calcs on my behalf. Based on this, I'll keep the term and retain the flexibility.

 

[Honestly]

Just closing the loop for anyone who's interested

• Paid 50k lump sum off EBS reducing mortgage to 276k
• Moved to Avant on a fixed rate 7 year 1.9% rate, literally getting that secured mid-July on the last day they'd accept those terms! Down to the wire securing the draw down. Feels like the best outcome given all the changes happening economically. My repayments dropped from ~1400 monthly to ~1000 monthly.
• Just overpaid 7k before 2023 ends and I lose the twice a year overpayment of 10% exception. Asked for it to be off the repayments rather than the term.