Tracker Mortgages - The Facts
Monday 4 April 2011
David Kerr - Money Expert
What is a tracker mortgage?
Tracker mortgages were first introduced in the late 1990s when Bank of Scotland entered the Irish mortgage market. A tracker mortgage is a mortgage whose rate is a mixture of fixed and variable - the variable part is the European central bank (ECB) rate - the fixed part is the amount of margin the bank makes above this. So for example, if the ECB rate is 1% as it has been over the past couple of years, and the margin the bank takes is 0.75%, then the mortgage holder would have a rate of 1.75%. These mortgages were extremely popular because they offered the customer the best possible rate for their mortgage - and the bank thought they were being clever by building in their margin - what they controlled - and passed on the ECB rate - which they did not control.
The net result of the tracker mortgage period was that up to 60% of mortgages by some banks were tracker mortgages.
Why is there an issue now?
The issue now is because of a simple flaw. The banks fund their mortgages through borrowing against their deposit book. The banks decided to lend to the household for 30 years, but they borrowed to fund these mortgages for a far lesser period - 2 - 5 years in many cases, that borrowing is at a variable rate. This means that the householder is protected by the fixed margin, the bank is not - in fact banks are predominantly now losing money on all tracker mortgages. In the case of Permanent TSB, they are losing about €380m per year on their tracker mortgages.
What are the banks trying to do?
All banks who have tracker mortgages are losing money on their trackers. They are all considering how to entice us to move off our tracker mortgages or increase the margin they earn on the tracker mortgage.
One incentive is to move us off our tracker and offer us early repayment incentive where they would credit our mortgage account more than we actually repay - so for example for every €100 we repay, they would credit our mortgage with €103. This incentive would serve to reduce the time it would take to repay the mortgage. However, the flip side is the mortgage holder would be moving off their tracker or would pay a higher margin over ECB rate of currently 1%.
Another incentive is to allow us to move our tracker if we move house. The mortgage is tied to a particular house. If we want to move home, we are required to take out a new mortgage, which would be subject to new rules. Some people who might be in a position to move home are resisting the move because they do not want to lose their precious tracker mortgage. The mortgage holder moves home but is offered their new mortgage as a tracker mortgage, although at a higher margin. The mortgage holder maintains the benefit of the tracker structure, but they give up some margin.
Is money back from a bank a good thing?
Both incentives are interesting, and may suit some customers who have trackers at present and either want to reduce the amount of time on their mortgage or move home. The question that we all need to ask ourselves if we are offered an adjustment to our tracker mortgage, who benefits? The bank or us? The general consensus is that the banks will benefit over the longer term. Some customers might want to gain a benefit, but this is likely to be over a short term period. For most customers on a like-for-like basis, it is likely that they would not be better off over the full term of their mortgage.
If the bank offers us a tracker adjustment, are we required to accept their change?
All mortgages are different, so the devil is in the detail and should be judged on a case by case basis. It is very probable that no bank can compel the householder to move off their tracker because their mortgage is a legally binding contract. If you don't like the look of the adjustment you are offered, you are not compelled to take the offer. If you are unsure or it looks like a good offer, you should seek independent financial advice.