Do I have to pay off the mortgage before the lender raises the interest rate?
I have a mortgage which is due to end in March 2023. Currently the fixed interest is 2.9% and is due to expire on April 1, after which the interest will change to variable interest. I hope to be 70 in May, so I will not seek any form of financial loan.
My question is, if I were to pay it back today, which is only over €6,000, would it be in my interest?
Ms. MC, email
Perhaps it’s because a mortgage is probably the biggest financial burden most of us are likely to take on that it sometimes seems to weigh more than it should. The circumstances of your question are quite specific due to the very short term remaining on your loan, but it is nonetheless an opportunity to consider the larger issues that need to be considered in weighing such a decision.
Despite all our concerns about mortgages, it remains true that it is the cheapest money you will ever borrow.
Either way, you only have one year left on the mortgage, so you should have a pretty clear idea of whether you need to borrow for anything else in those 12 months.
You are currently paying 2.9% on your mortgage: you can get fixed rates as low as 1.95% in today’s market. The cheapest personal loan, for comparison, costs 6.4%.
So in purely financial terms, it’s a very simple equation. If you intend to pay off a loan on which you are prepaying 2.9%, you need to ensure that you will not borrow money during the initial term of the mortgage at a higher rate – say 6.4% – for any other purpose.
Weigh your options
In your particular case, this is quite easy to assess. Either way, you only have one year left on the mortgage, so you should have a pretty clear idea of whether you need to borrow for anything else in those 12 months. If you do, don’t prepay the mortgage.
Any borrowing you might face after the mortgage is due is really irrelevant, because weighing the balance of financial benefits is only an issue when there are two competing uses for the money: l mortgage versus other expenses. Once the mortgage is paid off, the debate is over.
But what if you don’t plan to borrow for anything else during the remaining 12 months of the mortgage?
The standard advice for people whose lenders are looking to impose an uncompetitive mortgage rate is to consider switching
In this case, the dynamic changes, especially because you say that your lender will switch you to their variable rate in April when your fixed rate of 2.9% ends.
In your case, this variable rate seems to be 3.7%. So if you do nothing and let the mortgage expire within the next year, you will pay more interest than you do now. It doesn’t seem logical.
Standard advice for people whose lenders are looking to charge an uncompetitive mortgage rate is to consider switching loans. And, in general, this is very good advice. However, this will not work for you.
repay the loan
Switching saves money, but only over time, because you benefit from the guaranteed lower interest rate. There are initial costs involved in the change, including appraisal and legal fees. So for someone in your particular situation – only about €6,000 to pay and only one year left on the mortgage – switching is not a sensible alternative.
This gives you the option of early repayment. And, for you, that’s what will make the most sense. If you don’t plan to borrow money for anything else in the next year and you have the €6,000 handy, you should use it for pay off what’s left of your home loan.
You may not be able to do this while you are tied to the current fixed rate. Well, that’s not quite true; you will be able to do this, but the lender may charge you for the interest they lose during the remaining six weeks of the fixed rate. So the best thing to do is probably to wait until the very end of your fixed term, then, before the higher variable interest rate has time to accumulate, pay off the loan.
Please send questions to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email [email protected] This column is a reading service and is not intended to replace professional advice.
Get the latest business news and commentaryREGISTER HERE