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Homeowners with tracker mortgages are being urged to think very carefully before take inducements offered by banks to customers willing to switch to a variable interest rate.

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Homeowners with tracker mortgages are being urged to think very carefully before take inducements offered by banks to customers willing to switch to a variable interest rate.

Permanent TSB has outlined plans to reduce some of the principal on mortgages in exchange for interest rate rises, according to the Sunday Business Post.

The offer, which has been discussed at the highest level in the bank but has yet to be approved, would involve PTSB write off €10,000 on a mortgage or pay it in cash for every one per cent increase in the interest rate paid by the customer. So if the rate goes up by two per cent over two years, they will take €20,000 off the principal and if it goes up by three per cent, they will buy back €30,000 an so on.

However mortgage experts have said that this is not a good deal for customers on trackers and homeowners should not take it up if the Permanent TSB makes the offer.

'Absolutely do not move off your tracker'

“Absolutely do not move off your tracker unless the inducement is worth your while," Michael Downling of Independent Mortgage Adivsers Federation told RTE's Drivetime.

An incentive of €10,000 for a higher rate of one per cent interest rate doesn’t add up, he said.

He added: “The maths do not add up, it is not in your favour. Stay with your tracker mortgage. The banks can’t get out of them, they are there for the duration. The incentives have to be greater for them to work.”

“In my view they would have to be at least 10 per cent of the balance of the outstanding loan to even consider

“Do not forsake your tracker. Bank of Scotland have not been successful, Permanent TSB will not be successful at these numbers. “

Dowling calculated how much extra a borrower if it volunteered to go off its tracker rate in exchange for just €10,000.

“You take a customer with a mortgage of €250,000 they have 20 years left. At a tracker rate of two per cent, the total interest paid to the end of the 20 years would be €53,500. Let’s take same customer at Permanent TSB standard variable rate which is 5.19 per cent. They will pay an interest of €152,000 – three times as much,” said Dowling.

There are about 800,000 residential mortgage holders in Ireland, of which 350,000 are on trackers.

He explained the situation at length in an interview with Mary Wilson on RTE Radio's Drivetime on March 21 which can be heard here (from around nine minutes in).

Permanent TSB wants to nail 'buy-to-let' customers

Permanent TSB is considering following Bank of Scotland’s footsteps in a bid to improve its loan to deposit ratio as required under the IMG-EU bail-out deal.

It is also targetting buy-to-let customers who are in arrears. One mortgage-broker said: "They're not interested in sob stories, they're going to nail them."

Half of Permanent TSB customers on tracker

It is believed half of their €38bn mortgages are on tracker rates.

Tracker mortgages are the cheapest mortgages in the market because the interest rate is linked to the ECB rate and sometimes as low as 0.75 per cent above the rate, which is currently one per cent.

But banks are being charged much higher rates - as much as four per cent - to buy the money on the open market to cover the mortgage.

Some 50% of Permanent TSB’s loan book is on the tracker rate with similar ratios at AIB and Bank of Ireland who are also under pressure to come with ways of persuading people to come off the tracker.

The code of practice introduced by the Central Bank at the end of 2010 bars banks from forcing customers off tracker rates.

More information

Dec 6 2010: New code to halt repossessions

Dec 6 2010: Tracker mortgages - your rights