Paying of Mortgage Early - Discount?

noodler

Firstly, this may be better in the banking forum so mods let me know,.

Second, I am not asking for financial advice here - just wondering if anybody can clarify how this would work.


It is well documented that tracker mortgages are losing banks money and so they are quite likely to give you a discount on your outstanding balance of 40,000 (for example) - lets say they accept 30,000 in a lump sum to completely wipe the debt.

However, in the situation where the mortgage is at a variable rate...is there any advantage to the bank to provide a discount on a lump sum repayment? In the above example where there is an outstanding balance of 40k but on a variable rate, would there be any advantage to the bank in accepting a lump sum figure of less than 40k to wipe this debt clean?

Duckjob

noodler wrote: »

Firstly, this may be better in the banking forum so mods let me know,.

Second, I am not asking for financial advice here - just wondering if anybody can clarify how this would work.


It is well documented that tracker mortgages are losing banks money and so they are quite likely to give you a discount on your outstanding balance of 40,000 (for example) - lets say they accept 30,000 in a lump sum to completely wipe the debt.

However, in the situation where the mortgage is at a variable rate...is there any advantage to the bank to provide a discount on a lump sum repayment? In the above example where there is an outstanding balance of 40k but on a variable rate, would there be any advantage to the bank in accepting a lump sum figure of less than 40k to wipe this debt clean?

Open to correction here, but I don't think so.

Paying off portions of a loan early that is on variable rate just means that the bank will make less money out of you. They would sooner you pay over the agreed term so they can charge you interest over that term.

noodler

Duckjob wrote: »

Open to correction here, but I don't think so.

Paying off portions of a loan early that is on variable rate just means that the bank will make less money out of you. They would sooner you pay over the agreed term so they can charge you interest over that term.

Hmm, yes definitely my first thought.

I was just wondering if there was some Net Present Value angle to this where they would prefer '40,000 minus X' now rather than 40,000 over the next couple of years.

Milk & Honey

noodler wrote: »

Firstly, this may be better in the banking forum so mods let me know,.

Second, I am not asking for financial advice here - just wondering if anybody can clarify how this would work.


It is well documented that tracker mortgages are losing banks money and so they are quite likely to give you a discount on your outstanding balance of 40,000 (for example) - lets say they accept 30,000 in a lump sum to completely wipe the debt.

However, in the situation where the mortgage is at a variable rate...is there any advantage to the bank to provide a discount on a lump sum repayment? In the above example where there is an outstanding balance of 40k but on a variable rate, would there be any advantage to the bank in accepting a lump sum figure of less than 40k to wipe this debt clean?

There is anecdotal evidence that they are doing deals. All of the banks are cash hungry at the moment and need to get their gearing down and their cash reserves up. If the borrower is in arrears they will almost certainly accept a sum lower than that offered.

The_Conductor

Milk & Honey wrote: »

There is anecdotal evidence that they are doing deals. All of the banks are cash hungry at the moment and need to get their gearing down and their cash reserves up. If the borrower is in arrears they will almost certainly accept a sum lower than that offered.

Not entirely true- keep in mind the ECB have lent 1 trillion (1,000 Billion) Euro to European banks on 3 year, 2.5% rates- the European banking sector hasn't been as well capitalised in a long while. The issue is no-one wants to lend.

If you are willing to give up a tracker- you might expect to get a discount of up to 20-25% on the amount outstanding.

If you're repaying a variable rate mortgage early- it depends on the term, and the amount you're repaying- but typically, you'd expect to pay an early exit fee of up to 10-15% of the gross amount.

You will not get a discount on a variable rate mortgage if you repay it early- you will in fact have to pay an early repayment penalty- as you are costing the lending institution future earnings.

This is normal.

Mouldy Mary

smccarrick wrote: »

Milk & Honey wrote: »

There is anecdotal evidence that they are doing deals. All of the banks are cash hungry at the moment and need to get their gearing down and their cash reserves up. If the borrower is in arrears they will almost certainly accept a sum lower than that offered.

Not entirely true- keep in mind the ECB have lent 1 trillion (1,000 Billion) Euro to European banks on 3 year, 2.5% rates- the European banking sector hasn't been as well capitalised in a long while. The issue is no-one wants to lend.

If you are willing to give up a tracker- you might expect to get a discount of up to 20-25% on the amount outstanding.

If you're repaying a variable rate mortgage early- it depends on the term, and the amount you're repaying- but typically, you'd expect to pay an early exit fee of up to 10-15% of the gross amount.

You will not get a discount on a variable rate mortgage if you repay it early- you will in fact have to pay an early repayment penalty- as you are costing the lending institution future earnings.

This is normal.

Retention charges on mortgages were abolished in the 1980s by minister John Boland. The only charges allowed are for exiting a fixed rate.

Kosseegan

smccarrick wrote: »

Not entirely true- keep in mind the ECB have lent 1 trillion (1,000 Billion) Euro to European banks on 3 year, 2.5% rates- the European banking sector hasn't been as well capitalised in a long while. The issue is no-one wants to lend.

If you are willing to give up a tracker- you might expect to get a discount of up to 20-25% on the amount outstanding.

If you're repaying a variable rate mortgage early- it depends on the term, and the amount you're repaying- but typically, you'd expect to pay an early exit fee of up to 10-15% of the gross amount.

You will not get a discount on a variable rate mortgage if you repay it early- you will in fact have to pay an early repayment penalty- as you are costing the lending institution future earnings.

This is normal.

Irish banks are broke. The ECB money must be paid back. The banks will have to get another bail out in 2014 if they haven't deleveraged. They are scrambling everywhere for cash at the moment. They are forcing people with interest only loans to repay capital, thereby losing out on future profits for themselves.

As for redemption charges where are you getting 10-15% from?

http://www.bailii.org/ie/legis/num_reg/1987/0339.html

noodler

Many thanks to the last two posters for the information on no exit charges.

The account in question is actually with a building society.

If I were to go ahead and meet a bank manager regarding this issue and make them an offer below the total outstanding to wipe the debt (I understand it would likely be a minor discount if any as it is a variable mortgage), I would like to bring a professional with me to this meeting, would a solicitor or accountant be best or can somebody recommend another profession?

smccarrick wrote: »

You will not get a discount on a variable rate mortgage if you repay it early- you will in fact have to pay an early repayment penalty- as you are costing the lending institution future earnings.

This is normal.

I don't think this is as clear cut as you are making out. When issues like NPV and inflation are taken into account there may be genuine financial preference for a bank to have 37,000 right now, rather than 40,000 over the next 8 years.

Appreciate all the posts guys.

Kosseegan

noodler wrote: »

Many thanks to the last two posters for the information on no exit charges.

The account in question is actually with a building society.

If I were to go ahead and meet a bank manager regarding this issue and make them an offer below the total outstanding to wipe the debt (I understand it would likely be a minor discount if any as it is a variable mortgage), I would like to bring a professional with me to this meeting, would a solicitor or accountant be best or can somebody recommend another profession?




I don't think this is as clear cut as you are making out. When issues like NPV and inflation are taken into account there may be genuine financial preference for a bank to have 37,000 right now, rather than 40,000 over the next 8 years.

Appreciate all the posts guys.

There are individuals specialising in debt resolution with banks from a variety of backgrounds. Some accounting, some legal. The vast majority are dealing with arrears cases. Depending on whether you are worried about your credit rating you could look at engineering an arrears situation.

noodler

Kosseegan wrote: »

There are individuals specialising in debt resolution with banks from a variety of backgrounds. Some accounting, some legal. The vast majority are dealing with arrears cases. Depending on whether you are worried about your credit rating you could look at engineering an arrears situation.

Ah, definitely not..if your suggestion is entering arrears purposely to scare the bank into accepting a lower offer.

This isn't an arrears case.

phormium

I think, my personal opinion only, that you haven't a hope in hell of getting a discount on a variable rate loan. The banks have enough problems with arrears and I think there is no one in the bank to make this sort of decision, they can't make the most straightforward decisions not to mind something out of the ordinary like this. A bank manager will have no authority whatsoever to do something like this and will have to refer it up the line and no one is going to put their ass on the line by signing off on it. It's cya all the way in the banks these days.

Bigcheeze

I tried it with a tracker mortgage with EBS. The rate was ECB + 0.6%. The branch manager said "we don't have a product for that". I contacted the CEO who said they didn't think it was a good idea. It wasn't an arrears situation, I was just looking for a deal that was a win-win for both of us.

realgirl

I tried this with a tracker mortgage (ECB +.75%) at Ulster bank last year, was willing to give them €80k cash but they said they had no interest in deals of this type and their tracker mortgages were still profitable?!! I think the key thing was that our mortgage was not in arrears and we had never been late on any repayments in nearly 7 years, they are only doing deals when they think people can't afford the repayments. Also, if governments and the ECB keep bailing them out, they don't need to engage in these kinds of deals so there's little incentive for them to do this.

Milk & Honey

realgirl wrote: »

I tried this with a tracker mortgage (ECB +.75%) at Ulster bank last year, was willing to give them €80k cash but they said they had no interest in deals of this type and their tracker mortgages were still profitable?!! I think the key thing was that our mortgage was not in arrears and we had never been late on any repayments in nearly 7 years, they are only doing deals when they think people can't afford the repayments. Also, if governments and the ECB keep bailing them out, they don't need to engage in these kinds of deals so there's little incentive for them to do this.

Ulster bank are foreign owned. They are in a far different position to Irish banks.

The_Conductor

Milk & Honey wrote: »

Ulster bank are foreign owned. They are in a far different position to Irish banks.

True, however their Irish loan book is denominated in Euro, which is borrowed from the ECB, the same as the other lenders in the Irish market. They have been more forthright at discounting troubled mortgages- as evidenced by the continuous life support they demand from RBS, however, they, along with BOI- have little or no interest as private entities in facilitating write downs on book values (other than on a limited case-by-case basis). They have made offers along these lines to a few customers- however there is no corporate policy implementing this at present.

blueturnip

How easy is it to pay extra off a mortgage? e.g. let's say I decide I can actually afford to pay an extra €50 each month. Do I need to contact the bank or can I just start putting money into the account? Is it an actual account??

Thoie

blueturnip wrote: »

How easy is it to pay extra off a mortgage? e.g. let's say I decide I can actually afford to pay an extra €50 each month. Do I need to contact the bank or can I just start putting money into the account? Is it an actual account??

Just write to the bank - here's a letter I sent them earlier. I'd spoken to someone on the phone first to discuss it, and addressed it to her:

With effect from <date>, please increase the monthly payments to <this mortgage account> to €<amount> until further notice.
Please acknowledge receipt of this instruction and indicate the duration of the payments remaining based on current interest rates (I fully understand that these are likely to vary over time).

Depending on your account, you may be able to just add extra money (say by online banking or something), but writing a letter and getting them to confirm the new likely term of the mortgage is handy for your records, and in case any questions arise later.

blueturnip

Thoie wrote: »

Just write to the bank - here's a letter I sent them earlier. I'd spoken to someone on the phone first to discuss it, and addressed it to her:

Depending on your account, you may be able to just add extra money (say by online banking or something), but writing a letter and getting them to confirm the new likely term of the mortgage is handy for your records, and in case any questions arise later.

Thanks Thoie! I haven't actually started paying it yet but I think we can afford a bit more than the actual cost and obviously would prefer it was over sooner rather than later!

68Murph68

blueturnip wrote: »

Thanks Thoie! I haven't actually started paying it yet but I think we can afford a bit more than the actual cost and obviously would prefer it was over sooner rather than later!

Make sure you get confirmation on this from the bank.

The banks don't like you doing this as it cuts down on the the amount of interest they will make.

A lot of time they will give you guff about saving in a saving account rather than reducing what you owe them. Don't do this.

The sooner you start doing this the better. Even relatively small amounts on a monthly basis can take years off your mortgage.

Obviously the sooner you start doing this the better. If you can manage it in the early years of your mortgage you can make serious savings.

Also if you get any bonuses you can use these to make big one-off payments to reduce the capital as well. This can make a serious dent in the length of your mortgage especially if done early enough.

For the vast majority of people I would recommend this as the number one tip for financial security.

This is a certain sense of relief/security that comes when you have your own home and no-one has a claim over it.

djmcr

68Murph68 wrote: »

The sooner you start doing this the better. Even relatively small amounts on a monthly basis can take years off your mortgage.

Obviously the sooner you start doing this the better. If you can manage it in the early years of your mortgage you can make serious savings.

Also if you get any bonuses you can use these to make big one-off payments to reduce the capital as well. This can make a serious dent in the length of your mortgage especially if done early enough.

For the vast majority of people I would recommend this as the number one tip for financial security.

This is a certain sense of relief/security that comes when you have your own home and no-one has a claim over it.

If only the rest of us did this over the last few years we wouldn't be in half as bad a mess as we re in now. Sound advice

PWR

Bigcheeze wrote: »

I tried it with a tracker mortgage with EBS. The rate was ECB + 0.6%. The branch manager said "we don't have a product for that". I contacted the CEO who said they didn't think it was a good idea. It wasn't an arrears situation, I was just looking for a deal that was a win-win for both of us.

And that was that? Did anything further happen?

If you started reducing the payments and looked like you were going to go into arrears, then they might take the proposal more seriously?

The logic is a bit mad isn't it?

PWR

smccarrick wrote: »

Not entirely true- keep in mind the ECB have lent 1 trillion (1,000 Billion) Euro to European banks on 3 year, 2.5% rates- the European banking sector hasn't been as well capitalised in a long while. The issue is no-one wants to lend.

If you are willing to give up a tracker- you might expect to get a discount of up to 20-25% on the amount outstanding.

If you're repaying a variable rate mortgage early- it depends on the term, and the amount you're repaying- but typically, you'd expect to pay an early exit fee of up to 10-15% of the gross amount.

You will not get a discount on a variable rate mortgage if you repay it early- you will in fact have to pay an early repayment penalty- as you are costing the lending institution future earnings.

This is normal.

is the 20% discount for settling a tracker well accepted? As far as anyone knows does EBS do this?

Henry Ford III

If the mortgage is being serviced the banks won't offer any discount for early redemption regardless.

The reason it's costing them on a tracker is the margin is small and fixed, and their deposits are relatively expensive.

The_Conductor

PWR wrote: »

is the 20% discount for settling a tracker well accepted? As far as anyone knows does EBS do this?

EBS don't do it- to the best of my knowledge- AIB are on record as having been amenable to exploring this option- as have been BOI. I am not aware of whether they are still willing to explore this- I haven't heard of any recent cases.