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 pay-off 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 ECB 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.