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Friday 21 July 2017

How much of a payoff should you get to give up your tracker?

SWITCHING TO AN EXPENSIVE STANDARD VARIABLE MORTGAGE: The Independent Mortgage Advisers Federation (IMAF) calculated how much of a payoff you would need to get to make it worth your while switching from a tracker rate of 2.25 per cent to an expensive standard variable mortgage.

At 5.19 per cent, Permanent TSB has one of the most expensive standard variable mortgages on the market, and it is this rate which IMAF uses for its calculations. IMAF also assumes that interest rates remain unchanged for the life of your mortgage.

Permo would need to offer you €48,000 to entice you off your €100,000 tracker mortgage, according to Michael Dowling, spokesman for the IMAF. So in this case, you'd need a payoff equivalent to almost half your mortgage to justify giving up your tracker.

If you've got a tracker rate of 2.25 per cent, the interest on your €100,000 mortgage adds up to about €31,000 after 25 years, said Dowling. If you're paying a standard variable interest rate of 5.19 per cent on the same mortgage, the interest adds up to €79,000 after 25 years. The difference in the interest bill -- €48,000 -- is what Permo should pay you to move from your tracker rate of 2.25 per cent to its variable rate of 5.19 per cent, according to Dowling.

The interest on a €100,000 mortgage adds up to about €11,800 after ten years under a tracker rate of 2.25 per cent, according to Dowling. Under a standard variable rate of 5.19 per cent, the interest adds up to €28,400 after ten years. In this case, Permo would need to pay €16,600 to entice you off your tracker.

Permo would need to offer you €3,200 to entice you away from your tracker mortgage, says Dowling. This is because the interest on the €40,000 mortgage adds up to €2,300 over five years under a tracker rate of 2.25 per cent -- €3,200 less than the €5,500 interest you would pay under an interest rate of 5.19 per cent.

The smaller your mortgage and the closer you are to paying it off, the smaller the payoff you need to give up your tracker mortgage. Permo would only need to offer you €705 to give up a 3-year tracker mortgage of €15,000, according to Dowling. This €705 would cover the extra interest you would have to pay on the mortgage under a 5.19 per cent interest rate.

SWITCHING TO AN AVERAGE STANDARD VARIABLE MORTGAGE

You've got a tracker of 2.25 per cent. Your lender has a standard variable rate of 4.19 per cent -- not the cheapest standard variable rate around, but not the most expensive either.

So how much of a payoff would you need to make it worthwhile to move to an average standard variable rate, assuming interest rates remain unchanged for the life of your mortgage.

You've a 25-year tracker mortgage of €250,000. If switching from your tracker rate of 2.25 per cent to the standard variable mortgage of 4.19 per cent, you would need a €47,000 payoff to break even, according to Karl Deeter, head of customer advice with advisors.ie. You would have to use this €47,000 to reduce the amount you are borrowing -- so instead of borrowing €250,000, you borrow €203,000.

Over 25 years, the cost of borrowing €203,000 under an interest rate of 4.19 per cent comes to €328,000, according to Deeter. That €328,000 includes interest of about €126,000 and the original mortgage of €203,000. If you stick to your tracker mortgage of €250,000, the total cost of your mortgage after 25 years also works out at almost €328,000 -- that figure includes interest of €77,100 and the original mortgage of €250,000, according to Deeter.

As the cost of a €203,000 standard variable mortgage after 25 years works out the same as your 25-year tracker mortgage of €250,000, you would break even if your lender gave you €47,000 to give up your tracker.

Deeter insists, however, that you would need some other sweetener from your lender (on top of the €47,000 payoff) in return for giving up the guarantee of having an interest rate which tracks the European Central Bank rate.

"By giving up your tracker, you lose the security of having a fixed margin over the ECB rate," said Deeter. "Your bank could then go and change the margin it is applying to its variable rates. The bank would need to offer a mortgage holder something better than break even -- otherwise why would anybody go for it?"

Unlike tracker mortgages, where the interest rate only increases if the ECB rate increases, your lender can increase the interest rate on standard variable mortgages willy-nilly. So even if a whopping payoff from your lender makes sense today, giving up your tracker could turn out to be an expensive mistake if standard variable interest rates increase faster than the ECB rate does.

You've a 10-year tracker mortgage of €150,000. If switching from your tracker rate of 2.25 per cent to the standard variable mortgage of 4.19 per cent, you would need a €13,500 payoff to break even, according to Deeter.

Again, you would use this payoff to reduce the amount you're borrowing. So you borrow €136,500 over ten years at an interest rate of 4.19 per cent, instead of €150,000 over ten years at a tracker rate of 2.25 per cent.

The total cost of the ten-year standard variable mortgage of €136,500 comes to €167,300 -- including interest of €30,800 and the original mortgage of €136,500, according to Deeter. This is almost the same as what the tracker mortgage of €150,000 will cost after 10 years (€167,600 including interest of €17,600 and the original mortgage of €150,000).

As with the previous example, a €13,500 payoff merely allows you to break even if giving up your tracker. Your lender would really need to offer you another sweetener to entice you away from the security of your tracker mortgage.

You've a five-year tracker mortgage of €75,000. If switching from your tracker rate of 2.25 per cent to the standard variable mortgage of 4.19 per cent, you would need a €3,000 payoff to break even, according to Deeter.

That €3,000 must be used to reduce the amount you're borrowing -- so that you're borrowing €72,000 at an interest rate of 4.19 per cent instead of €75,000 at 2.25 per cent.

By doing so, the total cost of your €72,000 standard variable mortgage (including interest and the original mortgage) comes to €79,400 after five years -- the same as your tracker mortgage of €75,000 will cost over the same time.