By | September 20, 2022
Will a lump sum tracker mortgage save me more than locking in a fixed rate now?

We have a tracker loan, with about eight years left and a balance of about €120,000. 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 possibly locking in a higher, but fixed interest rate for a period, what if we choose to simply pay off some of the remaining principal? For example, if we paid €50,000 off the balance, would this simply reduce the monthly interest rate given the lower principal balance and also cut a few years off the mortgage term?

Mr JG, email

It certainly makes sense for anyone with significant debt to weigh up their options now that interest rates are rising – both here and more generally overseas – along with the cost of living. Stretching our euro as far as possible has suddenly become more important.

There are a couple of general points to make here. Firstly, whatever your mortgage rates – but especially if you’re on a tracker – this is the cheapest money you’ll be able to borrow. That means there’s no point in trying to shave off the margins on your mortgage if you’re going to need to borrow elsewhere for a car purchase, house renovation or whatever.

It is possible to have decent visibility of such things over an eight year period so it should be possible for you to get a good idea of ​​likely financial demands on this or other savings you may have. If it doesn’t need to be kept to avoid future, more expensive loans, it makes sense to deal with the mortgage.

Second, as you say, many are finally looking at switching options, especially locking into a fixed rate now in the face of further rate hikes. The bad news is that much of the best value is gone, and it was gone before the first ECB rate hike because the most competitive lenders saw what was coming.

You are not telling me your tracking margin. These generally ranged from one percentage point above the ECB to 1.5 points, so let’s split the difference and go to 1.25 points.

That means your tracker rate will jump to 2.5 per cent from next month after the ECB’s latest three-quarter point rate hike kicks in. The most competitive seven-year fix that would see your home loan close to default is 2.65 per cent, according to bonkers.ie, so there’s no advantage to switching.

You can get a more competitive short-term fix – four years – with Haven if you qualify for a green mortgage, but then there’s the big unknown of interest rates for the remaining four years of your mortgage. For calculation purposes, in a best case scenario where you can get that rate for the full eight years, your savings over your current position would be just under €2,600. I expect AIB’s Haven and others to raise these prices shortly.

So what about your lump sum payment idea?

It absolutely has the potential to reduce your interest bill or shorten the life of your mortgage.

Running your numbers through a mortgage calculator from the Competition and Consumer Protection Commission, you’re currently paying around €1,379 a month on your loan (when interest rates jump to 2.5 per cent next month). If you paid off €50,000 and the interest rate remained the same, your monthly repayments would drop to €804.

That would save you more than €6,000 in interest over the remaining term of the loan.

If ECB – and thus tracker – rates jump another half a percentage point, which seems inevitable, the monthly repayment would be higher than that and your interest savings would fall. Either way, that’s still well above what you could save by switching to a seven-year fixed rate.

You can also choose to pay off the €50,000 lump sum and continue your monthly payments at the current level. According to Bank of Ireland’s calculator, that would knock 3½ years off the term of your loan, meaning it would be fully paid off in 4½ years. Or you can do a bit of both – pay the lump sum and reduce your monthly payments but not down to the €800 level, which means lower monthly payments and a shorter mortgage term.

Your tracker is not a fixed rate so no penalties should apply for lump sums.

Send your questions 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

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