Has anyone ever paid off a mortgage early? Question on bank penalties!

joconnell

Hi Folks,

I'm just working out a situation taking over a mortgage and I wanted to get a few circumstantial bits of info. Has anyone here ever taken out a mortgage and then paid it back in a very short space of time? As in 2 or 3 years type of thing? I know the bank generally expects to make a certain amount of money over the life of the mortgage and thus if you pay it back far earlier they'll want a settlement amount to cover the loss of expected earnings. Has anyone any examples of this? I've asked my bank for details of how much it would have been at the time but since a request wasn't put in they wouldn't have recorded the details needed to work this out accurately so I'm trying to get even a ballpark idea of what the banks might look for.

Cheers!

John

Mezcita

Depends on the type of mortgage you have. Banks impose penalties on overpayments of fixed mortgage but have different rules if you are on a variable/tracker.

It's up to the bank to provide you with the details as per your mortgage agreement.

joconnell

Fair enough - the bank didn't have any details for the past few years since they only bother looking if you ask about closing the mortgage - basically I can't get this info apparently hence looking for other peoples experiences - I know it's not directly applicable to me but it's better than no information at all!

Mezcita

That's the thing though. You're entitled to be advised by the bank what their rules are regarding overpayment of the mortgage. Ideally they don't want you to overpay it as they won't benefit from your years of interest payments.

I'd suggest writing a letter to the manager of the branch and to get a bit arsey about it.

homer911

In the current climate, no bank is going to complain about you paying off your mortgage early! They will just be thankful you are paying it!

joconnell

That's true but again it's not what I'm after - it's more part of a hypothetical situation about what it would have costed at the time had the house been sold - I will not be paying it back early, it's just part of a dispute where the other party thinks if the house was sold at a specific time there'd be megabucks of profit on it and from what I've been advised this isn't the case! Hence trying to figure out an approximate of what type of penalty the bank had applied to other folks who had paid off early!

pjmn

If it were a variable rate mortgage there would have been no penalty for clearing same...

The fixed rate mortgage presents a different issue, and not one that could be easily answered here I think, you would need to know the mechanism the bank would use to calculate the panalty (should be in your letter of offer, it will probably include: a) the remaining term on the fixed rate period at the proposed clearance date, b) the balance on that date, c) the fixed rate being charged, d) the equiavlent rate of the same fixed period on the date of proposed clearance...

For example ...

(Amount x (R - R1) x Time) divided by 36500.
Amount = Mortgage outstanding
R = Costs of funds for the bank for the fixed rate period (i.e the rate on your loan offer)
R1 = Interest rate available to the bank for funds placed on date of early repayment.
Time = Number of days between date of early repayment and end of fixed rate period.

Example: E250,000 mortgage
two years remaining on fixed rate term (730 days)
Original cost of funds say 4%
Interest rate now available to bank - say 1%

... would lead to a E15,000 breakage fee/penalty

regards,


pjmn

jimoc

I'm with KBC and currently on a fixed rate.
The way they calculate it is to take the amount of interest that would be earned on the outstanding amount per month and multiply it by the number of months left of the fixed term.
Example :

100K at 12% (ridiculous I know but it makes the sums easier )
Fixed rate left of 24 months.

You pay it off and it costs you 1% of 100K per month left = 24K

In my own case it was 3 years left of 4.89% of 175K which worked out at about 8K to pay off.

They may even calculate it daily as it would work out more expensive for you that way I think.

joconnell

jimoc and pjmn You're stars - that was exactly what I was looking for and a good solid lead to go on. Much appreciated.