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Early Mortgage Payment via loan at Lower rate

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  • 28-06-2017 3:28am
    #1
    Edke
    Registered Users Posts: 3 ✭


    I'm working outside of Ireland and have an opportunity to borrow at a lower rate than my existing Irish mortgage rate.

    Given the chance to reduce the term of the mortgage this seems to be make sense.

    What potential risks am I not thinking of here? The lower rate loan is a personal loan.


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    #2
    Peregrinus
    Registered Users Posts: 26,511 ✭✭✭✭Peregrinus


    The personal loan may be repayable earlier (or the bank may have the right to call for repayment earlier) than the mortgage loan. If you took out the personal loan, and then were required to repay at short notice, could you? If not, then check that the term of the personal loan is absolutely fixed to the term you want, and can't be changed by the bank.

    Similarly, check the terms of the new loan regarding variation of the interest rate over the life of the loan. It's cheaper now, but will this always be the case? [Pro tip: think very carefully about this point. A bank making a secured loan is taking on less risk than a bank making an unsecured loan of the same amount. Therefore, you you expect that in the long run the secured loan will be cheaper. If it looks as if the unsecured loan will be cheaper, on the face of it that's very surprising - almost too good to be true. And of course things that are too good to be true frequently turn out not to be true. So be sure that the unsecured loand will be cheaper, and be sure that you understand why it is cheaper.]

    The personal loan may not be denominated in euros (depending on where you are working) and, if it isn't, by switching part of your borrowings into the new loan you're taking on an exchange rate risk that you don't currently face. [It occurs to me that the most likely reason that the foreign loan is cheaper is that it's denominated in a currency with lower interest rates. But the reason the interest rates are lower is, at least partly, because that currency is expected to appreciate relative to the euro.]


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