Tough out high mortgage rate instead of paying penalty

Q&A:Q WE ARE a young couple and bought our house in Dublin (three-bed semi with garage) in 2006 at the top of the market for €920,000 and paid Government stamp duty of nearly €83,000.

Our mortgage is with ICS Building Society and the mortgage loan taken out initially was for €670,000 over 30 years. We had a one-year discounted variable for the first year of 3.65 per cent and then decided to fix the rate for three years at 4.89 per cent, which ends in March 2010.

We are paying €3,549 a month and I received our mortgage statement the other day and in one year we have only managed to pay back €7,000 off the mortgage!

I contacted ICS, initially last November, to see how much it would cost us to exit the fixed rate and to go on to a variable.

At the time it was costing €500 to €600 (the rate changes every day). I rang up in December and the rate had changed to roughly €5,000. By mid-January, it was more than €13,000. Is there anything we can do to exit this fixed rate and go on to a variable (even with the same bank) and avoid having to pay these excessive charges?

One thing to note – once we exit the fixed rate of 4.89 per cent in March 2010, we will automatically go on to a tracker mortgage (ECB plus 1.25 per cent), so is it worth paying the excessive fixed rate now to be able to go on to a tracker mortgage for possibly the remainder of the mortgage?

Ms C.McK., Dublin

AYou are far from unique in the position you find yourself. In truth, the key to this query, to my mind anyway, is in your final paragraph.

All institutions, as far as I am aware, charge a break fee for people seeking to get out of a fixed-rate mortgage and move to a variable rate. Unfortunately, there is no uniform way in which they calculate the extent of that fee – and very little transparency on the issue.

Essentially, the break fee is supposed to offset the cost to the bank of the difference between the three-year money it accessed to fund your mortgage and the current cost of money to fund a variable-rate mortgage.

What I don’t understand is the tenfold increase in that cost between November and December of last year and the further 160 per cent increase in January. The ICS is now apparently looking for close to four months’ payments on a rate that will expire in 12 months.

Even more astonishing, it is missing the chance to shift you to a variable rate rather than the tracker rate that will cost it far more when you can eventually transfer next March. Frankly, it sounds like someone is bungling their arithmetic.

From your point of view, as I said at the outset, the key is in the final paragraph of your letter.

I appreciate that it is deeply depressing to be paying a fixed rate far in excess of current rates. It can seem like you are working just to pay the mortgage – and it doesn’t help in the early years when all those monthly payments appear to knock just fractions off the overall mortgage loan.

However, from next March, you will be on a tracker rate, a rate so generous in the current conditions that no Irish bank now offers trackers to new customers.

If you move to a variable rate – even with a lower break fee – you will never, in all likelihood, get back to a tracker again. The difference between the variable (3.25 per cent / 3.6 per cent APR) and the tracker (2.75 per cent currently) is significant. And you will still have more than 25 years on the mortgage to benefit from that gap.

One general thought on fixed rates. In my experience, you should always assume that bank auditors have a better read on the future direction of rates than an individual borrower – eg banks generally make more on fixed rates. That is particularly true in the more organised era of the European Central Bank. For customers, the benefit, if any, is in the security of knowing exactly how much their mortgage will cost month to month.

Q How can Mr P.W. generate a capital loss of €42,500 for CGT purposes by disposing of his Bank of Ireland shares now?

The fact that the shares were worth €45,000 two years ago is surely immaterial, unless he actually happened to buy them at this cost then – this does not appear to be case.

It is my understanding that the calculation of an allowable loss for CGT purposes is based on the actual cost to him of the shares, less the proceeds and associated expenses of disposal – and not on what is now the historic value of €45,000 that he

states.

Mr B.H., e-mail

A You are quite right in how capital gains tax (CGT) is assessed – eg, on the difference between the actual cost of accruing shares and the actual price of their sale, allowing for costs incurred in the transactions.

But my understanding is that Mr P.W. did buy the shares in question two years ago, when they were valued at €45,000. By my reading of his question, this is not simply a case of him cherrypicking a point in time when the shares were at their highest.

However, there was another issue with the answer to last week’s query – which concerned Mr P.W.’s plan to gift the shares to his children at their now diminished value and any tax implications thereof. I stated, among other things, that such a transfer would crystallise a loss in capital gains terms, which he could offset against gains elsewhere.

It turns out, not for the first time, that I have been tripped up by the massive tome that is the Taxes Consolidated Act 1997.

There is a section – section 549 (3) – that sets down special rules for transactions involving connected parties. The act would consider Mr P.W.’s children to be connected parties.

It basically provides that any capital loss incurred in this instance by the father on the transfer of the shares to his children can only be set off against gains on other disposals to those children rather than, as stated in my response, on any capital gains. My thanks to the Revenue for putting me right.

Please send your queries to Dominic Coyle, QA, The Irish Times, 24-28 Tara Street, Dublin 2 or by e-mail to dcoyle@irishtimes.com.

This column is a reader service and is not intended to replace professional advice.

Due to the volume of mail, there may be a delay in answering questions. All suitable queries will be answered through the columns of the newspaper.

No personal correspondence will be entered into.