We have a tracked mortgage, with a life of about eight years and a balance of about 120 thousand euros. Like many of your readers, we are now trying to evaluate options moving forward given the disruption. As opposed to shopping and possibly holding a higher but fixed price for a period, what happens if we choose to simply pay off a portion of the remaining principal? For example, if we pay €50,000 of the balance, will that simply reduce the monthly interest due to the lower total equity balance and also cut a few years off the mortgage term?
Mr. JG, email
It certainly makes sense for anyone with large loans to weigh their options now that interest rates – both here and abroad in general – have risen along with the cost of living. Extending the euro as far as possible suddenly became more important.
There are two general points to be made here. First, whatever mortgage rates you use – but especially if you use a tracker – these are the cheapest money you can borrow. This means that there is little point in trying to reduce your mortgage spreads if you are going to have to borrow elsewhere to buy a car, renovate a home, or something else.
It is possible to have a good view of such things within an eight-year window, so it is possible to get a good idea of the potential financial calls on this or other savings you may have. If there is no need to hold it to avoid more expensive borrowings in the future, then mortgage processing is a reasonable proposition.
Second, she says, a lot of people are finally looking at switching options, especially fixing on a fixed rate now before interest rates increase. The bad news is that much of the best value faded, gone before the first ECB rate hike as the most competitive lenders saw what was coming.
You don’t tell me your tracking margin. These generally ranged from 1 percentage point above the ECB to 1.5 points, so let’s split the difference and go to 1.25 points.
This means that your tracking rate will jump to 2.5 per cent from next month after the start of the last three-quarters point rate increase from the European Central Bank. The most competitive seven-year fix that will make your home loan nearly reach maturity is 2.65 percent, according to bonkers.ie, there’s no point in switching.
You can get a more competitive shorter term fix – four years – with Haven if you qualify for a green mortgage but then there are big unknowns about the interest rates for the remaining four years of your mortgage. For calculation purposes, in the best case scenario where you can get that rate for a full eight years, your savings on your current position would be just under €2,600. I expect AIB’s Haven and others to raise these rates soon.
So what about your idea of paying off a swamp?
It certainly has the potential to cut your interest bill or shorten the life of your mortgage loan.
Running your numbers through the CPC mortgage calculator, you’re paying around €1,379 per month on your loan currently (once the rate jumps to 2.5 percent next month). If you pay 50,000 euros and the interest rate remains the same, your monthly installments will be reduced to 804 euros.
This will provide you with more than 6000€ in interest over the remaining life of the loan.
If the ECB – and therefore the tracker – jumps interest rates by another half a percentage point, which seems inevitable, your monthly repayment will be even higher, and your savings in interest will drop. Either way, it’s still way ahead of what you can save by switching to a seven-year fixed rate.
You can also choose to pay a lump sum of 50,000 euros and continue your monthly payments at the current level. According to the Bank of Ireland calculator, this would cut 3 1/2 years from the life of your loan, meaning it would be paid back in full within 4 1/2 years. Or you can do a little of both – pay a lump sum and reduce your monthly payments but not to the 800-euro level which means lower monthly payments and a shorter mortgage term.
Your tracker is not a flat rate, so no penalties should be applied to lump sum payments.
Please send your inquiries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to email@example.com. This column is a service to the reader and is not intended to replace professional advice