herald

Tuesday 19 September 2017

Dan White: Keep a hold of that tracker mortgage. It could save you €100k

Remember a few years back, the banks couldn't sell us enough tracker mortgages. These were mortgages which charged a fixed margin, usually 1.5pc, over official ECB rates for the life of the loan.

Turns out that, if you're a bank anyway, that you can have too much of a good thing.

Since the credit crunch first struck in August 2007 a huge gap has opened up between official ECB interest rates and the interest rates charged on the money markets where the Irish banks actually buy the money which they lend to their customers, including homeowners.



TEARS

This hasn't been a major problem with most other types of lending including personal loans, business loans, credit cards etc, which are either and/or short-term or variable (floating) rate.

However, the banks are tied into tracker rates for the full life of the mortgage, which can run for 30 years or longer.

This means that the banks are now losing money hand over fist on tracker mortgages.

In the first year of a €300,000 mortgage a bank could now be losing over €5,000 on a tracker compared to what it could charge for a standard variable-rate homeloan. Doesn't it bring tears to your eyes!

Not surprisingly, many banks are desperately seeking to extricate themselves from these tracker loans as fast as possible. Many of them are reputed to be offering to pay their customer up to €15,000 to walk away from their tracker mortgages.

Don't even think about it. Any homeowner trading in his or her tracker mortgage for either a variable or fixed-rate homeloan needs their head examined.

By my calculations someone on a 30-year, €300,000 tracker mortgage would be up to €101,000 better off over the life of the loan than they would be if they opted for a standard variable-rate mortgage (see panel).

As the Irish property market has collapsed many of the foreign banks which flocked to lend money to Irish homeowners are now fleeing the market.

Halifax is already gone and several more will have disappeared by the time we emerge from the downturn.

Now that they either have or are about to exit the Irish market the last thing these banks want is a long tail of loss-making Irish mortgages, many of which won't be fully repaid much before the middle of the century. As a result they are making increasingly desperate efforts to escape from these onerous liabilities.

Well, guess what, that's their problem. Irish homeowners entered into these fixed-rate mortgages in good faith and their lenders are legally obliged to honour them.

So what should you do if your bank approaches you with an offer to buy out your tracker mortgage? Well the first thing to remember is that a tracker mortgage now represents a valuable asset.



GRIP

In most cases offers of even €15,000 don't even come close to representing the true value of the tracker. Someone on a 30-year €300,000 gtracker at 1.5pc over the official ECB rate is up to €101,000 better off than someone on the current Permanent TSB variable rate of 4.19pc.

Even better, most of these savings will occur in the early years of the mortgage. Someone trading in that benefit for less than €70,000 is allowing themselves to be taken advantage.

Until banks start making realistic offers, homeowners should keep a firm grip on their tracker mortgages.

How it all adds up

- €300,000 30-year mortgage

- 4.19pc variable rate: €1,467 per month

- Tracker at 1.5pc over ECB (2.5pc): €1,185 per month

- Total saving over 30 years: €101,520

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