Question on Lump sum and Fixed Rate mortage

I’m running some numbers at the moment on going with a fixed versus a variable rate mortgage.

I had have an 80% LTV to benefit from a more favourable interest rate but I think we might find a better value house in the current market in the “needs work” category. There’s obviously one that’s peaked my interest.

Have been offered what looks like a decent rate for 2 years 3.65% fixed 80-90% LTV versus 3.69% variable at 60-80% LTV. (Incidentally, it’s 3.7% to fix for 3 years)

The plan would be to use some of the deposit money for renovations instead, borrow in the 80-90% LTV range and fixing for 2-3 years. Then when the term is up move onto variable in the 60-80% range. This would be more achievable the closer to 80% we are initially obviously. My question is, as I know you can’t overpay on a fixed rate mortgage, can you pay a lump sum at the end of the fixed rate term or are there penalties? Or does that depend on the T&Cs with each bank?

entirely depends;

even with a fixed rate mortgage you can sometimes pay off a lump sum without penalty

  • e.g. Ulster Bank would have allowed me to pay 10% per year without penalty

But if you’re at the end of the fixed term rate you should be. :confused:

I’m assuming the transition from Fixed to Variable is seamless. Therefore there might not be a window in which I can pay in my lump sum and I will default to the higher rate before I get a chance to erode the principal.

I know I could ask the bank (and probably will), but I’m not going to simply take the word of someone on the banks mortgage approval team.

Best to get good advice alright if you can. Having said that, even if your worst case scenario was that you transitioned from the Fixed to a SVR before paying off your lump - surely after the payment you could present your new LTV (and updated value of home) to avail of the lower interest rate. Ok, it might mean paying the slightly higher amount for a month or so - but it’s not a bad situation to be in.
Best of luck, and let us know how it goes - it’s an interesting one.

PS Similar to an earlier post - a friend of mine has had a Fixed BOI mortgage for last few years and he was able to overpay the mortgage without any penalty. So it’s worth checking out that first.

I had a fixed rate mortgage for a while and the thing I regretted was not being able to overpay the mortgage as my wages grew considerably in the fixed rate period. However later on I discovered that you don’t have to fix all of your mortgage. You could fix, say, 80% of the mortgage and pay variable on the rest. You can then pay off the variable part as you please. This was quite a while ago so I don’t know if the option is still available but I’d be surprised if it isn’t as the bank shouldn’t really care.

Thanks. The split option was something I’ve considered too but not to the point of actually doing the Maths or inquiring with the bank about it yet. It’s just that little bit more messy I guess.

when you are on a fixed loan, in theory the bank takes out an interest rate swap to fix the repayments over the life of teh fixed period.

To unwind that swap, there is a break fee (99% of the time, but if interest rates go sky high, your swap is in the money and you, in theory, should be owed money depending on the loan agreement).

Therefore, once you are off the fixed loan period, you shouldn’t have to pay. So if you are on the variable part of the loan you don’t have a break fee.

As metal mike has pointed out, you can get a porportion of the loan fixed. Say 50% as an example. that means the bank hedges 50% of the balance as a fixed rate of the fixed rate term. So say you fix for a year at 50% of the loan balance, you could prepay 50% of the amount without a big break fee. At the end of that 1 year period you can prepay anyway - before you fix again.

I work in a bank with bigger ticket items, and we use interest rate swaps a lot, and the theory is the same for houses. Read the fine print for prepayment fees which are different to break fees.

That’s what I’m after. Is that the same with every bank?

The rest if your post was interesting and your example has given me food for thought as. It’d be the rate offered for the variable half that would irk me though I’d imagine. For 80-90% the variable the rate is 4.10% at the moment.

I should have posted earlier, which I did in my previous post.

It’s actually 3.65% Fixed V 4.1% Variable @ 80-90% LTV. That doesn’t appear as too bad a bet to me.

The 3.69% variable is at 60-80% LTV which I stated in the first post.

you keep repeating this mantra that anyone buying Fixed Rate is getting shafted by the bank/canny trader

traders/investors/banks/brokers both buy and sell the fixed all the time - it’s a liquid market- the idea that anyone buying fixed is always getting screwed is simplistic.

the margin added on by the bank after the Interest Rate fixing is as if not more important. IN fact this is probably the perfect illustration

My 2c is that banks will have to reduce SVRs/margins due to competition

I’d agree that it’s a little simplistic. You have to factor in that the market moves, and taking out that movement on your payments has a value. Whether it’s worth it for you is another question. Also rates can go up or down…

Taking slashers point a step further, using the link below you can see the 1 year fix is 0.3% vs a 1 month fix at 0.01%. That is pure market. If the rate you get is 4.3% for a one year, and a 4% rates 1 month variable, they are making the same margin. Actually, there is a cost for putting the fix in place, which is the credit spread, ie the chance you won’t pay the break as you default on the whole outstanding. Plus admin.

That’s assuming the banks marginal cost of funds is based on the euribor…

But if another bank who wants to push variable funds into the Irish market for some reason, comes in, other banks will want to stay competitive and bring their variable rates down. There is a lot of liquidity in the system, but I’m not sure people really have the appitite for Irish Mortgage risk. non recourse and recouse pricing? a pretty good way to keep competitors out…

Lots of good info here but going back to the original question, how to pay off additional capital.

It will depend on the Ts&Cs but one way I’ve done it in the past is to reduce the term on a SVR mortgage to increase my payments to the amount I could afford to overpay. Incidentally, I wasn’t actually allowed to overpay per se (i think because it was a discount SVR), but doing it this way was perfectly acceptable to the bank.