SIOBHÁN BOUGHT a three-bedroomed semi- detached house in Dublin in 2001 for €300,000. In the early years of her mortgage she was on a variable rate, but last May she locked into a fixed rate at 5.5 per cent, in order to give her some certainty over the next five years. Now however, she is struggling to meet her monthly repayments of €1,700, having had her salary cut by 20 per cent and she is wondering should she switch to back to variable.
STEP 1
Siobhán is informed by her lender that it will impose a six-month interest charge of €8,300 to break her fixed mortgage contract.
STEP 2
Although her bank is advising that rates are likely to rise again, she is disinclined to believe it and thinks rates will stay low for the next few years.
STEP 3
If Siobhán switches to one of the more attractive variable rates on offer, such as 2.65 per cent, her monthly repayments will fall by almost €500 to €1,208.89. If interest rates stay as they are for the next 12 months, she would save €5,940 by switching, and if they stay for 18 months, she will save €8,910 and €11,880 over 24 months. If interest rates fall by another 25 basis points and if the mortgage provider brings rates down by the same amount, the amount saved is greater (12 months: €6,402 ;18 months: €9,594; 24 months: €12,792).
STEP 4
As Siobhán took out her mortgage in 2001, she has a LTV of 75 per cent, which means she will be able to get some of the better rates on offer.
STEP 5
Variable rates at Siobháns mortgage provider are very attractive so she will not have to switch lenders.
CONCLUSION
Interest rates will have to remain at the current level for at least the next 18 months for it to make sense for Siobhán to switch. If they do so for the remaining four years of her fixed rate, she will save about €24,000 by switching now, or €15,700 when the cost of the breakage fee is included. Over the remaining 22 years of her mortgage, she would be looking at savings of €132,000 in interest payments if rates stayed so low.
A more attractive option for Siobhán would be if she could afford to keep her monthly repayments at €1,700, as by switching to a variable rate and over-paying her mortgage, she could significantly reduce the term of her mortgage – by up to 12 years – as well as save up to €200,000 in interest payments over the life of the mortgage.
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