We have a tracker mortgage, with about eight years remaining and circa €120,000 balance. Like many of your readers, we are now trying to weigh up the options going forward given the turbulence. As opposed to shopping around and potentially locking in a higher, but fixed rate for a term, what happens if we opted to simply pay off a portion of the remaining capital? For instance, if we paid say €50,000 off the balance, would this simply reduce the monthly interest given the lower capital sum balance and also cut a few years off the mortgage term?
Mr JG, email
It certainly makes sense for anyone with substantial borrowings to weigh up their options now that interest rates are rising – both here and more generally abroad – alongside the cost of living. Stretching our euro as far as possible has become suddenly more important.
There are a couple of general points to be made here. First, whatever mortgage rates you are on – but especially if you are on a tracker – this is the cheapest money that you will be able to borrow. That means there is little point trying to shave margins off your mortgage if you are going to have to borrow elsewhere for car purchase, home renovation or whatever.
It’s possible to have decent visibility on such things over an eight-year window so it should be possible for you to get a good idea of likely financial callings on this or other savings you might have. If it does not need to be retained to avoid future, more expensive borrowings, then addressing the mortgage is a reasonable proposition.
Second, as you say, a lot of people are finally looking at switching options, especially locking into a fixed rate now ahead of further interest rate rises. The bad news is that a lot of the best value is gone, and it was gone ahead of the first ECB rate rise as the most competitive lenders saw what was coming.
You don’t tell me your tracker margin. These generally ranged from one percentage point over ECB to 1.5 points, so let’s split the difference and go for 1.25 points.
That means your tracker rate will jump to 2.5 per cent from next month after the most recent three-quarter point ECB interest rate rise kicks in. The most competitive seven-year fix which would get your home loan almost to maturity is 2.65 per cent, according to bonkers.ie, so there is no benefit in switching.
You could get a more competitive shorter term fix – four years – with Haven if you qualify for a green mortgage but there is then the great unknown on rates for the remaining four years of your mortgage. For calculation purposes, in a best-case scenario where you could get that rate for the full eight years, your saving over your current position would be just under €2,600. I expect AIB’s Haven, and others, to raise these rates shortly.
So what about your idea of paying off a lump sump?
Absolutely it has the potential to cut your interest bill or shorten the life of your mortgage loan.
Running your figures through a mortgage calculator supplied by the Competition and Consumer Protection Commission, you are paying about €1,379 a month on your loan currently (once the rate jumps to 2.5 per cent next month). If you paid off the €50,000 and the interest rate stayed the same, your monthly repayments would fall to €804.
That would save you more than €6,000 in interest over the remaining life of the loan.
If ECB – and thus tracker – rates jump another half percentage point, which seems inevitable, the monthly repayment would be higher than that and your interest savings fall. Either way, it is still well ahead of what you can save with a switch to a seven-year fixed rate.
You could also choose to pay off the €50,000 lump sum and continue your monthly payments at the present level. According to Bank of Ireland’s calculator, that would knock 3½ years off the life of your loan, meaning it would be fully paid off in 4½ years’ time. Or you can do a bit of both – pay the lump sum and reduce your monthly payments but not down to the €800 level meaning lower monthly payments and a shorter mortgage term.
Your tracker is not a fixed rate so no penalties should apply for lump sum payments.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice
