Capping mortgage rate

Cantoris

Not sure if this is the right section but here goes anyway and thanks in advance for any advice.

I'm on a tracker at a thankfully favourable rate over ECB. Which is great in the current lowering interest environment. However, I have been reading Warren Buffett's take on inflation over the recovery years and while I know that's the States and Europe is different, the fundamentals could still be the same. Trichet is a divil for tracking inflation and will no doubt increase rates quickly to curb inflation when the economies inevitably bounce. Given that Ireland is liekly to be a good bit behind this bounce, I'd be concerned that pay cuts and increasing interest rates are not healthy for cashflow.

So was thinking of fixing in. Five year money is at 2.8% and creeping up by the day. But my bank manager has told me that if I was a fixed 5 year rate I need to break my tracker and go onto their fixed rate which is extortionate at the moment. So was wondering if there is any other way of doing it. I'm trying to protect against interest rates being over say 4%. Is it possible to buy a cap in the market? Pay some cash upfront but the cap kicks in if interest rates rocket and protect your downside.

I don't even know where to start with this so any views would be appreciated.

waster81

hi no i wouldnt be changing from tracker best one to be on at the minute, the banks are no longer offering these to customers, and there has to be a reason i.e they arent making money on these.

bobbbb

Cantoris wrote: »

Not sure if this is the right section but here goes anyway and thanks in advance for any advice.

I'm on a tracker at a thankfully favourable rate over ECB. Which is great in the current lowering interest environment. However, I have been reading Warren Buffett's take on inflation over the recovery years and while I know that's the States and Europe is different, the fundamentals could still be the same. Trichet is a divil for tracking inflation and will no doubt increase rates quickly to curb inflation when the economies inevitably bounce. Given that Ireland is liekly to be a good bit behind this bounce, I'd be concerned that pay cuts and increasing interest rates are not healthy for cashflow.

So was thinking of fixing in. Five year money is at 2.8% and creeping up by the day. But my bank manager has told me that if I was a fixed 5 year rate I need to break my tracker and go onto their fixed rate which is extortionate at the moment. So was wondering if there is any other way of doing it. I'm trying to protect against interest rates being over say 4%. Is it possible to buy a cap in the market? Pay some cash upfront but the cap kicks in if interest rates rocket and protect your downside.

I don't even know where to start with this so any views would be appreciated.

Start lashing big overpayments off your mortgage.

This is what several of my mates are doing right now. And i intend to do the same if/when i buy.

Use this link to see the effect of these.
http://www.drcalculator.com/mortgage/

You could easily know many years off the other end of your mortgage this way.

The more you get paid off, the less interest you pay in future as whatever you have overpaid attracts no interest for the rest of your term.

Senna

You're on a good tracker and assuming you have a good few years left on your mortgage i.e. 15 years or more, you will pay much less over the life of the mortgage with the tracker rather than fixing now and going into a standard variable after the fixed. Are you finding repayments tight or are you just trying to beat the bank? You will beat the bank if you stay on your tracker but the bank will profit if you give up the tracker.

dny123456

In the long term your tracker is the best bet, as previous poster says. Fixing you are reducing your risk, but ultimately you pay more, unless you are very lucky. Sit tight and put the money your saving towards a nest egg. I wouldn't pay off the principle, as you can make more money from your savings than you save on the mortgage.

ZYX

bobbbb wrote: »

Start lashing big overpayments off your mortgage.

This is what several of my mates are doing right now. And i intend to do the same if/when i buy.

Use this link to see the effect of these.
http://www.drcalculator.com/mortgage/

You could easily know many years off the other end of your mortgage this way.

The more you get paid off, the less interest you pay in future as whatever you have overpaid attracts no interest for the rest of your term.

Whatever you do, do not make overpayments on your mortgage. It makes very little sense. Forget charts about how much you can knock off your mortgage. ECB rates next month will drop to 1%. If you are on a 1% above ECB rate you will be paying 2% interest on your mortgage. By paying off your mortgage early, it means you are effectively earning 2% interest on the amount you overpay. You can earn 7.3% with Anglo Irish Bank for amounts up to €1,000 a month. Why limit yourself to earning 2% when you could earn 7.3%. Put your money in a savings account for as long as deposit rates are higher than mortgage rates. Then if/when mortgage rates go up you have the option of using your lump sum saved to pay off some of your mortgage.
The other advantage of doing this is that it means you a lump sum saved which may come in very handy in these uncertain times.

Gurgle

Cantoris wrote: »

Given that Ireland is liekly to be a good bit behind this bounce....

Why?
Whether we agree with the tactics or not (personally NOT) we're all taking a hammering now so that when the global economy recovers we'll be in a position to jab the old tiger with some adrenelaine and take the opportunties that arise.

Theres a reason why fixed rates are so much higher - no bank is going to give you a term rate which is remotely likely to be less than the tracker rate over the term. The more uncertainty about future rates, the more safety margin they build into the fixed term rates they're offering.

bobbbb

ZYX wrote: »

Whatever you do, do not make overpayments on your mortgage. It makes very little sense. Forget charts about how much you can knock off your mortgage. ECB rates next month will drop to 1%. If you are on a 1% above ECB rate you will be paying 2% interest on your mortgage. By paying off your mortgage early, it means you are effectively earning 2% interest on the amount you overpay. You can earn 7.3% with Anglo Irish Bank for amounts up to €1,000 a month. Why limit yourself to earning 2% when you could earn 7.3%. Put your money in a savings account for as long as deposit rates are higher than mortgage rates. Then if/when mortgage rates go up you have the option of using your lump sum saved to pay off some of your mortgage.
The other advantage of doing this is that it means you a lump sum saved which may come in very handy in these uncertain times.

That 7.3% regular saver is before DIRT. Also its only a 1 year term. Its just over 5% after dirt. The 5% you get is only on your first payment too. Which means that your last payments are earning damn all for you.

Overpay your mortgage. And get used to overpaying, so you can keep it up for the full term. Dont mind all the stuff about interest rates and better off putting the money in a bank account. The truth is that most people will not save properly. When you are used to paying it off the mortgage you wont feel it. Everything you overpay now saves you interest for the full term of your mortgage. Get rid of it as quickly as you can.

If you think you have what it takes to keep saving €1000 a month and pay that money off at the end of the year, then by all means do it. But remember the banks are full of tricks and will drop your interest rate on regular saver accounts without letting you know. Have a look over on Askaboutmoney.com. And dont forget about the Dirt either.

If it were me i would overpay by every penny i could get my hands on to get the mortgage term down.

ZYX

bobbbb wrote: »

That 7.3% regular saver is before DIRT. Also its only a 1 year term. Its just over 5% after dirt.

5% is still a lot better than 2%.

bobbbb wrote: »

The 5% you get is only on your first payment too. Which means that your last payments are earning damn all for you.

In exactly the same way as overpayments on your mortgage are calculated.

bobbbb wrote: »

Overpay your mortgage. And get used to overpaying, so you can keep it up for the full term. Dont mind all the stuff about interest rates and better off putting the money in a bank account. The truth is that most people will not save properly. When you are used to paying it off the mortgage you wont feel it. Everything you overpay now saves you interest for the full term of your mortgage. Get rid of it as quickly as you can.

If you think you have what it takes to keep saving €1000 a month and pay that money off at the end of the year, then by all means do it. But remember the banks are full of tricks and will drop your interest rate on regular saver accounts without letting you know. Have a look over on Askaboutmoney.com. And dont forget about the Dirt either.

If it were me i would overpay by every penny i could get my hands on to get the mortgage term down.

If you overpay your mortgage by €1000 every month at the end of 1 year you will have reduced your mortgage by approx €13200. If instead you put your money in Anglo Irish (and I use Anglo as an example. Lots of banks are offering high interest accounts) at 7.3%, and at the end of the year use the money to pay off your mortgage you will have reduced your mortgage by an extra €150. Obviously the longer you do it for the more you save.

bobbysands81

bobbbb wrote: »

Start lashing big overpayments off your mortgage.

This is what several of my mates are doing right now. And i intend to do the same if/when i buy.

Use this link to see the effect of these.
http://www.drcalculator.com/mortgage/

You could easily know many years off the other end of your mortgage this way.

The more you get paid off, the less interest you pay in future as whatever you have overpaid attracts no interest for the rest of your term.

May I suggest that you don't pay off chunks of your mortgage just yet. Instead transfer the extra money (that you were going to use to pay off the capital on the mortgage) into a separate bank account just in case times get tough for you during the recession. Then when we have turned the corner, and things are looking up again, you can then use this money to pay off a chuck of your mortgage... if you have been lucky enough to not have to dip into it.

bobbbb

ZYX wrote: »

If you overpay your mortgage by €1000 every month at the end of 1 year you will have reduced your mortgage by approx €13200. If instead you put your money in Anglo Irish (and I use Anglo as an example. Lots of banks are offering high interest accounts) at 7.3%, and at the end of the year use the money to pay off your mortgage you will have reduced your mortgage by an extra €150. Obviously the longer you do it for the more you save.

Not true. That account has a 1 year term, so you can do it any longer. Yu'll have to find another product at the end of the year.

Get the money off the mortgage as quickly as possible. Its more straightforward and you wotn be tempted to dip in and use the money for a holiday etc. Also if times get tough you have overpaid you mortgage and can take a payment holiday until all of your overpayments are used up.

ZYX

bobbbb wrote: »

Not true. That account has a 1 year term, so you can do it any longer. Yu'll have to find another product at the end of the year.

I am not sure what you mean by "untrue". All I said is true. If you want to throw money down the drain then pay off your mortgage early. Remember banks want you to pay off your mortgage early especially if you have a good tracker. You can be assured that if it is good for the bank it is bad for you.

Cantoris

Thanks for the reponses. I'm keeping as much cash in my pocket as possible. Just making my normal repayments on a 22 year mortgage. If I lose my job (god forbid), I'd like a buffer of cash.

One poster thinks that a global bounce will suddenly kick start us. That is certainly a plausible view, not one that I share to be honest. I don't think people realise how exposed Ireland Inc is with Anglo's debt but that's for another thread.

I'm not trying to break out of my tracker. I'm trying to buy a cap with a third party. So, for example, i pay them €5,000 now and if ECB rate is below 5% nothing happens. If it goes over 5%, they pay the portion over 5%. It's a simple risk/reward formula. So the lower cap will cost me more money to secure. It's simply that I can't find anyone to do it. They are available to the wider commercial market but not in my sort of value. Alternatively I'd enter into a swap to pay fixed rate now at the forward curve rate.

both of these allow me to keep my tracker but I would be protected from a massive upswing in rates by having a contract with a third party. I'd imagine the third parties problem would be that they are taking personal risk i.e. if I lost my job could I pay the fixed rate??

Hope this clarifies as I wouldn't be breaking my tracker which is important, obviously.

Victor

Cantoris wrote: »

But my bank manager has told me that if I was a fixed 5 year rate I need to break my tracker and go onto their fixed rate which is extortionate at the moment.

Ask him to show you the bits of the contract that say this and ask him how much and what the calculations are.

blast05

Perhaps a dumb question but how do overpayments work ? Will the bank accept an unscheduled deposit into the mortgage account at any time that will reduce the overall term of the mortgage ? Up to now, i have just got the bank to reduce the overall term of the mortgage with associated increased monthly payment - have done it twice (started at 35 (4 years ago), down to 17 now .... and i know they will not allow me to go back up again)

Seperately, re the trackers, i have a tracker at 1.63% above ECB (i'm furious with myself in that i could have got a NIB one at 0.5% about 2 years ago but never got the finger out) ...... so same question here as first one - at this very high level of tracker, would i be better of taking a 5 or 10 year fixed ?

uberwolf

blast05 wrote: »

Perhaps a dumb question but how do overpayments work ? Will the bank accept an unscheduled deposit into the mortgage account at any time that will reduce the overall term of the mortgage ?

On a variable/tracker rate, the short answer is yes.

Carawaystick

Some banks might reduce the repayment amount and keep the term of the mortgage the same if you make a lump sum overpayment.