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Saturday 21 October 2017

No end in sight to our variable rate mortgage misery

AIB's plan to allow borrowers to transfer tracker mortgage when moving home will increase the supply of houses coming on the market.

Unfortunately the plan, revealed this week, does nothing for the hundreds of thousands of homeowners trapped with expensive variable rate loans,

The proposal is simple. If you are an AIB customer with a tracker mortgage you will now be able to bring your loan with you when moving home.

Up to now AIB customers with tracker mortgages moving home have had to give up their trackers so, not surprisingly, very few of them did move.

Bank customers with tracker mortgages pay a fixed margin, usually between 0.5pc and 1.25pc over official ECB rates, which currently stand at an all-time low of just 0.15pc.

This means that customers with tracker mortgages are paying interest rates between 0.65pc and 1.4pc. By comparison many variable rate customers pay 4.5pc.

The reluctance of homeowners to give up their trackers is one of the reasons so few homes have come on the market.

Last year a mere 27,500 houses and apartments were sold - the equivalent of every one of the country's almost 2 million houses and apartments changing hands just once every 73 years.

Now AIB has joined Permanent TSB and KBC Bank in allowing homeowners to move their tracker for the full term of the loan (Bank of Ireland and Ulster Bank only allow customers who move keep their trackers for five years).

Admittedly there is a slight catch. AIB will charge customers who move an extra 1pc on the transferred tracker. But the plan's still attractive.

Unfortunately good news for those with tracker mortgages is almost certainly bad news for those with much more expensive variable rate mortgages.

What, if anything, can be done to help these 770,000 unfortunate borrowers?

competitors

Under normal circumstances the enormous margins being earned by the Irish banks on variable rate mortgages would attract competitors into the market offering cheaper loans.

Unfortunately the Irish banking market isn't normal at the moment - far from it. Two of the three domestic banks, AIB and Permanent TSB, are virtually completely state-owned while the third, Bank of Ireland, is 14pc state-owned.

Meanwhile, several foreign-owned banks, including Bank of Scotland and Danske, have pulled out of the Irish market while there is uncertainty over the future of Ulster Bank.

This means that the Irish-owned banks can do pretty much what they like.

And that's exactly what has been happening. With over half of their mortgage books locked into loss-making trackers the Irish banks have been ruthlessly squeezing their variable rate borrowers instead.

It may be little consolation to them, but what has been happening to variable rate mortgage customers is merely an extreme version of the behaviour of the Irish banks as they milk their good customers to make up for the losses they suffered on their bad loans.

This unsatisfactory state of affairs looks set to continue until a foreign-owned bank with no legacy loans can be persuaded to enter the Irish mortgage market and rescue variable rate mortgage customers from the clutches of their lenders.

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