Paiyng off Mortgage sooner than agreed with a Bank

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Hi All, I am deciding on type of interest rate. I understand that if I have a variable interest rate I can pay larger amount (than monthly payments set by a bank) each month to pay my mortgage off more quickly. This way I become more independent of the bank earlier and will avoid paying large sums on interest rates over loan duration (as long as I can afford these higher payments each month). Does any have a better understanding of this as well as pros and cons and in and outs? Many thanks.

Yes, tell them to vary the DD up every month or chuck in a lump sum or both. No restrictions.

Make sure you rightsize your mortgage insurance in view of the lower trajectory of outstanding.

Thank you 2Pack. Could you explain the second sentence: Make sure you rightsize your mortgage insurance in view of the lower trajectory of outstanding.

Additionally, would you advise to go for the longest possible loan duration with lower monthly payments (i.e. 30 years) BUT pay off as early as possible OR go for shorter loan duration (i.e. 20 years) which means higher monthly payments and still try to pay off as quickly as possible if in position to do so. Would appreciate thoughts on this. I would be inclined for the first option (agree longest loan duration but pay off as quickly as possible). Would this be the right approach?

Thanks!

The advice I read a while ago was…

Do not increase your DD. Instead, make a series of one-off payments under an explicit agreement that these are to be treated as payments in advance.

This way, if you subsequently run into financial difficulty the bank cannot start the arrears clock until the advance payments run out.

Haven’t tried it yet myself.

I once did a couple of extra payments and then had a brief period where cash was short, I asked the bank for some back to cover the limited shortfall and was refused!

Thank you.

  1. Are there any drawbacks to paying mortgage off early - any penalties incurred by the bank in the end?

  2. Also is my understanding correct that if someone takes a loan out at €100k with i.e. say aib for 30 years (as per mortages.ie calculator bit.ly/14TFlTY it will take that person only 15 years to pay off his/her whole mortgage with total costs amounting to €135,774. Is this reasoning correct or are there other costs incurred if a mortgager decides to take own initiative like this to avoid paying high total costs over long period of time?

Please note that I used only figures for illustration purposes. Thank you.

I couldn’t accelerate payments on my mortgage but that was with the HFA.

See if you can accelerate payments now.
Every place is cash hungry.

I’d be surprised if anywhere said no to extra cash.

HFA is basically beuraucratic civil service; Housing Finance Agency.
they would have been happy to take my money off me early but they wouldn’t change/reduce the method of interest calculation so I would have got no benefit from it.
And I eventually cleared it all by selling the apartment and getting the f*ck out of Ireland.

  1. Are there any drawbacks to paying mortgage off early? - any penalties incurred by the bank in the end?

  2. Also is my understanding correct that if someone takes a loan out at €100k with i.e. say aib for 30 years (as per mortages.ie calculator bit.ly/14TFlTY it will take that person only 15 years to pay off his/her whole mortgage with total costs amounting to €135,774. Is this reasoning correct or are there other costs incurred if a mortgager decides to take own initiative like this one to avoid paying accumulated high total costs over long period of time?

Thank you.

If I understand your question correctly, yes the bank can incur losses if you pay off your mortgage early.
If you mean "does the mortgage borrower incur any penalties, the answer is “sometimes but it depends on the T&Cs for a given mortgage”.

Again, the other costs depend on the T&Cs for a given mortgage. In some cases you might have an early repayment fee - I think in Ireland this happens with fixed rate mortgages - in other cases the possibility of early repayment might be dealt with in the initial agreement.

In general, the quicker you can pay off the mortgage the less total amount you’ll pay back.

Thank you ex-Patrick.

Based on my own experience and that of a friend:
Generally, there is no penalty for paying off early unless you are in a fixed rate agreement.
Where you overpay early on they generally won’t let you subsequently reduce payments to below the level of the original repayment except by agreement.

Thank you nosy parker, could you please clarify your last sentence as I am a bit confused about its meaning: Where you overpay early on they generally won’t let you subsequently reduce payments to below the level of the original repayment except by agreement. Thanks!

Say your repayment is 1000 per month, per the repayment schedule.
You repay 3000 per month for 2 years.
You then need to put a new roof on the house and so are short of cash. You cannot just decide “I’ll not make any mortgage payments for the next 6 months”, or “I’ll only pay 500 per month for the next 6 months” - they’ll expect 1000 per month unless they agree otherwise.
That’s what my friend was told anyway.

Overpayments just reduce the term of the mortgage (and by quite a lot if done early on) , eg a 25 year term can become 15 years if aggresively overpaid.

Most post 2000 mortgages come with contractual payment holidays ( you may be entitled to 6 months off or a year at interest only or both) in the original contract. EG Permo and BoI had these conditions as standard for many years, probably not now. Keep them in case you need them.

Some funny ( IE crooked ) banks such as INBS will only credit an overpayment once a year on 30 April or some such, best to give them an annual lump lump sum. BOSI may be another.

Proper banks credit the overpayment the same month. Check to see if your bank is funny OP, if so go the lump sum route not the monthly route and have it in in late April but not too late. But on a variable there is a procedure to overpay with every bank.

Thank you. I was told that I should set up for weekly (alternatively bi-weekly) repayments with my loan provider as this would save lot of money on the interest over the loan term. Do you have experience with this?

There’s load of info on AAM about this.

e.g.

askaboutmoney.com/showthread.php?t=101819

I’d agree with many of the previous posters. The bank may lose money if you repay early on a fixed loan, because they have hedged out their interest rate risk.

The general guideline is that the sooner you pay back the principle that sooner you don’t have to pay back the interest on that principle. Ie if you get paid on the last friday of the month, set the mortgage to be paid off the next day. that would be cheaper than using holding onto the payment and then paying that over 4 weekly payments.

Asking for money back is a big thing. They won’t like changing the payment terms, unless it means more cash for them. I think its prudent to put aside a little safety fund for those little or big things that happen. If this fundbuilds up massively, you can always use some of it to pay off your loan. If you want the security of fixed, you can always put extra money aside, and as soon as the fixed period is up, pay down the mortgage.

Effectively know all about the time value of money, and read the fine print of loan documentation. Best of luck, and great to hear you are considering overpaying your repayments.

All these people in arrears and here you are considering overpaying? Shouldn’t you do the decent things and sponsor a distressed borrower :wink:

Don’t let David Hall hear about your plans…