Fixed rate mortgage redemption charge calculation?

the_amazing_raisin

Hi folks

I'm going to be making an overpayment on the mortgage this year and we typically go to the maximum allowed which is 10% of the remaining balance on January 1st

I've noticed that the redemption charge, which depends on two interest rates:

R, the interest rate available to the lender for funds placed in the money market on the start date of the relevant fixed rate period for the duration of the relevant fixed rate period

R1, the interest rate available to the lender for funds placed in the money market on the date of the early repayment for the remainder of the remainder of the relevant fixed rate period. The rate applied is based on the remaining fixed term of the mortgage, rounded to the nearest month if less than one year or to the nearest year if greater than one year

Okay...so what the hell does that mean?

My very basic is that these come from the ECB rates

Given the calculation is based on R-R1, which produces a negative result given the ECB rate has increased since I started the fixed rate, the early redemption charge would actually not apply is my understanding

So I could actually go above the allowed 10% without penalty is my reading

Obviously I'd go to the bank to confirm this but I wanted to know if anyone has any knowledge of this before I do

Thanks in advance!

Q&A

Lenders are only allowed charge a break fee If they are out of pocket when you look to overpay. Some provides, like yours, allow a certain overpayment before they calculate a break fee.

R is the rate they could have gotten by depositing their funds on the interbank market the day you fixed. Let's assume you fixed for 7 years then it's something like the 7 year swap rate is the appropriate reference rate. R1 is the corresponding rate on the day you break. Let's assume it's 1 year after you fixed. The appropriate rate is the current 6 year swap rate.

If R>R1 then they are out of pocket and can charge a break fee. I.e. , the difference between the rates by the amount you overpay (In excess of your allowed overpayment i.e., the 10%)

R<R1 and your lender will now earn more money then they would have a year ago so they can't charge a break fee.

All financial rates change over time so your break fee changes on a daily basis. The reference rates may be slightly different for each lender so only you're lender will know for sure.

The ECB started putting up rates roughly 6 months ago and markets started factoring that in some months before that. What that all means is it's very likely if you took out your mortgage before then that the relevant interbank rate (R1) has increased above the original rate R.

If that is the case you can ignore the 10% limit then you can overpay as much as you like and not face a beak fee. Alway check first mind you.

Q&A

If you want to get an estimate of your own break fee you could try

https://www.askaboutmoney.com/threads/mortgage-switching-re-fixing-%E2%80%93-breakage-fee-calculator-and-savings-estimates-for-your-case-ireland.226638/

the_amazing_raisin

Thanks for all the help @Q&A, it's clarified things a lot

That link you provided had some great info in it, including a link to the interbank rates

We fixed at 2.25% back in 2021 when rates were negative, it looks like our break funding should be zero

It doesn't really affect us this year as we're not really going to be able to pay more, but if the rates stay above 2021 levels then we might be able to go over the 10% mark next year

walterking

Considering that rates are probably never going back to zero you are unlikely ever to have a break fee.

the_amazing_raisin

https://www.boards.ie/discussion/comment/120092375#Comment_120092375

Well they said back in 2012 that rates would never go negative and they did.

And people were saying last year that rates would never go above 2%, and they did

But I think you're right, my fixed rate is up in 2025 and it's likely rates will still be above 2021 levels by then

the_amazing_raisin

Interesting update, I was speaking to PTSB confirming the 10% max repayment was the same as UB (our mortgage got sold to PTSB)

They said that PTSB aren't enforcing the limit and I could repay as much as I wanted. I didn't ask for details but I suspect it's due to rising rates and an early redemption charge wouldn't apply