what is the maths for ditching fixed and paying penalty?

Nifty_Purse

Following intalex’s equations:

Does this seem correct and worth it?

Moving from 4 year FRISA at 1.40% ending 31/05/2024 to 3 year at 4.40% ending 31/12/2025.

 

A = £69730.84 balance

B = 1.40% current rate

C = 568 days remaining term from 11/11/2022

D = 120 days penalty

E = 4.40% new rate

F = 1147 days new term from 11/11/2022

 

Lose:

1.      Interest for remaining term:

69730.84 x 1.40 x 568 / 365 = 151917.70

2.      Penalty interest:

69730.84 x 1.40 x 120 / 365 = 32095.29

Total (X):

69730.84 x 1.40 x (568 + 120) / 365 = 184013.00

 

Gain (Y):

New interest earned over remaining term:

69730.84 x 4.40 x 568 / 365 = 477455.65

 

Y – X = 293442.65

 

Edit simplified:

4.40 / 1.40 – 1 = 2.14

120 / 568 = 0.21

> = yes

Or edit 2:

4.40 > 1.40 x (1 + 120 / 568)

              [1.69]

> = yes

Feedback welcome as never felt the need to do a midterm transfer and work this out before now. 

intalex

Interest rates are in % and therefore I would divide the rate by 100 in all the equations, i.e 1.40/100 or 4.40/100

Otherwise, the calculations seem to follow my method; there may be some variation in case the current ISA provider applies the penalty to any accrued interest (not included in your A) and the C may (will) be a bit less since it'll take some time for the associated ISA transfer to be completed. But I don't think it will sway the impact much. In your case you'd be tying up the funds for another 579 days.

This is how I evaluated my decision when I took a penalty hit and switched; hopefully someone else will comment to see if I'm missing anything in applying my method.

Nifty_Purse

Thanks, intalex. Understood. I hope others will comment too. A bit surprised more people aren't posting about this topic on the forum, but I suppose most may not know it's even possible to move midterm from a fixed account.

J63320

I am in this position and am intending to do a transfer with penalty soon - I missed the Dudley 4.2% 18 month fix due to excessive  dithering. I’ve done a spreadsheet showing month by month what the total value of my existing ISA is and what the transfer value would be after the penalty; I can then start with the transfer value in the appropriate month, and see how the value of the new account would grow and when it would outstrip the existing one.
One additional point, though: my existing account was a fairly recent transfer that looked like a good deal before the Kwarteng budget sent rates rocketing, and it has a high balance, though not as much as Nifty_Purse’s. I’m thinking that now I’ll do a partial transfer, and not have so many eggs in the one basket. The existing provider has confirmed that in the event of a partial transfer the penalty is taken from the remaining balance, not from the amount transferred out.

intalex

intalex said:

Please feel free to comment/correct, but I use the following math to evaluate this decision:

A = Current balance (£)

B = Current fixed interest rate (%)

C = Current remaining term (days)

D = Penalty interest for breaking term (days)

E = New fixed interest rate (%)

F = New fixed term (days)

What you lose if you switch:

1. Interest earned for remaining term in current fixed rate account: A*B*C/365

2. Penalty interest: A*B*D/365

Total: X = A*B*(C+D)/365

What you gain if you switch:

Interest earned over current remaining term: Y = A*E*C/365

If Y > X then you are better off paying the penalty in switching PROVIDED you are happy to tie up your money for F-C additional days (or C-F less days) at the new interest rate E

Edit:
Further simplified to: If E/B - 1 > D/C then it's worth taking the hit and switching

Should also factor in A to quantify the benefit (Y-X from above) and F to consider how much longer the money is tied up (F-C days)

Edit2: Even more simplified in words:

A penalty hit and switch is worth it IF:

provided other factors (£ value of difference and additional term) are acceptable.

For my 1000th MSE forum post, I wanted to bump up this old message of mine, spent good time deriving it and may not be useful again anytime soon, but who knows...