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 Post subject: Fixed Rate Early Redemption Charge - How to calculate it?Posted: Thu Nov 09, 2017 2:21 pm
 Of Systemic Importance Joined: Aug 20, 2009Posts: 5157
So I wondering whether to go fixed or not for 3 years. There's a chance I might want to change after 2 years.

Looking at Ulster Bank's website they give the following info

Early Redemption Charge
If you pay off a fixed rate mortgage before the end of the agreed fixed period or change to another interest rate before the end of the agreed fixed rate period, an early redemption charge will be applied. This charge will be either an amount calculated using this formula, whichever is lower:
Redeemed amount x (R - R1) x Time remaining in days until the end of the fixed rate period) divided by 360.

In this formula:
Redeemed amount means the estimated average loan balance between the time of the proposed repayment or interest rate conversion and the end of the relevant fixed rate period, assuming that no such repayment or interest rate conversion takes place and that all scheduled repayments of the loan are made by the borrower under the terms specified in the loan offer. Where a lump sum repayment is made, redeemed amount shall mean the amount of the lump sum repayment.

R means 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 means the interest rate available to the lender for funds placed in the money market on the date of the proposed early repayment, lump sum repayment or interest rate conversion for the remainder of the relevant fixed rate period. The rate applied is based on the remaining fixed rate term of the mortgage, rounded to the nearest month if less than one year or to the nearest year if greater than one year.
Time means the number of days from the date of early repayment, lump sum repayment or interest rate conversion to the end of the relevant fixed rate period.
Six months interest is the estimated interest that would be payable in the six months following the proposed repayment or interest rate conversion.

Typical Example
In the example below, a customer took out a 5 year fixed mortgage at a rate of 5.00% on 1st January 2014. On 4th January 2015, the mortgage outstanding was €100,000 and the customer opts to break out of the fixed rate. The breakage cost calculation is:

Redeemed Amount = €87,832.42
R (Market rate on 1st January 2014) = 2.849%
R1 (Market rate on 4th January 2015) = 1.713%
Time = 1,457 days
Breakage Calculation = (Redeemed Amount x (R-R1) x Time) divided by 360 = (€87,832.42 x (2.849% - 1.713%) x 1,457)/360 = €4,038.22
Six Months Interest = €2,500
Therefore, in this case the customer would be charged the lesser amount of the six months interest i.e. €2,500.

My problem
1.That example is far from typical. e.g. breaking after 1 year into 5 year term, increasing the cost
2.They are using finance costs from 2014 and 2015. I suspect the difference between 2016 and 2017 is far lower.
3. They are using a 5% interest rate vs 2.95% <60 LTV for a 3 year rate at present
4. I'm not sure where the 6 months is coming into it if he Fixed in Jan 2014 and is trying to break in Jan 2015

If I knew pt 2. Finance cost, I could give the Early Redemption Fee calculation a go.

Any ideas?

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 Post subject: Re: Fixed Rate Early Redemption Charge - How to calculate itPosted: Thu Nov 09, 2017 2:55 pm
 Property Magnate Joined: Mar 30, 2016Posts: 661

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 Post subject: Re: Fixed Rate Early Redemption Charge - How to calculate itPosted: Thu Nov 09, 2017 3:14 pm
 Of Systemic Importance Joined: Aug 20, 2009Posts: 5157
cyrusir wrote:

Cheers. I figured the cost was a few hundred but nice to see some discussion

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 Post subject: Re: Fixed Rate Early Redemption Charge - How to calculate itPosted: Thu Nov 09, 2017 3:25 pm
 Property Magnate Joined: Mar 30, 2016Posts: 661
TheJackal wrote:
cyrusir wrote:

Cheers. I figured the cost was a few hundred but nice to see some discussion

no problem

a friend of mind had fixed with ub at 3% and soon after the 2.6% came out, they wouldnt do anything for him.

He asked for the break fee and it transpired it was 0 so he broke and then refixed at 2.6%

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 Post subject: Re: Fixed Rate Early Redemption Charge - How to calculate itPosted: Thu Nov 09, 2017 5:19 pm
 Under CAB Investigation Joined: May 12, 2012Posts: 2074
The bank will never tell you the values used in the formula either at origination or mid-term. I have tried very hard on this. All they will tell you is the price (which fluctuates daily) to break when you call.them up.

For info BoI as of today are using a margin of about 0.3pp annualised to break a 1-year fixed rate.

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