The European Central Bank - like its counterparts globally - has been pushing interest rates higher at an alarming rate amid an inflationary surge.
Last summer, the base borrowing rate was at zero and financial institutions were being charged for depositing money with the ECB.
Today, the borrowing rate is at 2.5% and the deposit rate is at 2% and there's speculation of more rate hikes to come.
While the main banks have been relatively slow at passing the rate hikes on to borrowers who opt for a fixed rate arrangement (they have started to do so), those on tracker mortgages have felt the full brunt of the rate increases.
Limited sympathy
Tracker mortgage holders have had it good for a long time, so those who have been paying higher rates on fixed or standard variable rate mortgage arrangements will likely harbour low levels of sympathy for that cohort now.
However, the hike in their repayments over the last few months has been quite dramatic.
Trackers are named as they 'track' the ECB base rate, but generally have a margin attached.
So, for example, someone who was on a tracker with a margin of a percent would have been lucky enough to have been paying just that 1% on their mortgage from early 2016 until last July.
Now, that same person would be paying a rate of 3.5% - a jump of 2.5 percentage points in just six months.
That rate is close to - or actually higher than - some of the standard variable rate offerings from the main banks.
So, it's advisable for tracker mortgage holders to reach for their calculators and figure out if the tracker is still their best option or if they should look at some of the comparatively attractive fixed rate options on the market at the moment.
Dramatic increase
Daragh Cassidy, Head of Communications with price comparison website bonkers.ie, did some back of the envelope sums on the figures.
He calculated that a tracker mortgage holder with €200,000 remaining on their loan, taking into account the three separate increases by the ECB since July, would now be paying around €220 a month more than what they were last June.
That amounts to €2,600 per year on top of what the mortgage holder had been paying in 2021, for example.
However, banks stopped offering trackers in 2008 which means that the last such products to have been issued are now at least 14 years into their mortgage term.
Mark Coan of moneysherpa.ie, using Central Bank figures, determined that the average outstanding mortgage in Ireland amounts to €132,000 with the remaining term averaging at 15 years.
The average rate on outstanding trackers is the prevailing ECB rate plus 1.15%.
That equates to an average tracker rate right now of 3.65% with an average monthly repayment of €953.
He determined that the best fixed rate on the market - fixing for a period of four years - was 3.17% APRC (Annual Percentage Rate of Charge - which calculates the total amount of interest that will be paid over the entire period of the loan. It usually differs from the advertised interest rate).
Moving to that product would see the average tracker mortgage holder saving around €5,580 over the remaining term of their mortgage, he calculated.
"With tracker rates set to rise further in February, fixing now may not only save money, but also protect mortgage holders from future increases," Mr Coan said.
"In spite of this, tracker customers, especially those paying a margin of 1% or less, can take some comfort from the fact their rates are still relatively competitive," he added.
To fix or not to fix?
And therein lies the dilemma for tracker holders. There are close to 244,000 tracker mortgages still being serviced by property owners but not all were created equally!
Some offer lower margins than the average, meaning some are still quite cheap in the context of the wider market.
AIB offered a margin as low as 0.45% in 2007, according to Brendan Burgess, founder of the financial information website, askaboutmoney.com, equating to a rate of sub 3% right now for anyone lucky enough to have obtained and retained that ultra-low margin - albeit a very rare occurrence.
However, if the base rate goes to 3 or 3.5%, even that bargain basement tracker starts to look less attractive and fixed rates will likely have moved higher at that stage too.
"Not so long ago, it was possible to get a fixed rate of just 1.90% - albeit with caveats," Daragh Cassidy pointed out.
"By this time next year, the cheapest rate is likely to be over 4%," he cautioned.
In other words, the likely future trajectory of fixed rates also needs to be factored into calculations and they could be in line for another hike very soon.
"Despite inflation easing, it looks likely we will see 2-3 more rate increases this year, so tracker customers will face increasing mortgage hikes for some time yet," Joey Sheahan, Head of Credit with online brokers, MyMortgages.ie, and author of the Mortgage Coach warned.
"This is possibly the most important financial decision you will make in 2023, so consider your options and understand where you stand from a cost and potential savings perspective," he said, adding that householders should seek advice from a broker before taking such steps.
On the other hand...
So, it's acknowledged that rates are likely to go further north in the months ahead, but beyond that there is little certainty.
Analysts are expecting the main ECB borrowing rate to move towards 3% by the summer - bringing them closer to what would be considered a more 'normalised' interest rate environment.
However, a looming recession in much of the global economy - which may visit the euro zone at some point - could stay the hand of the ECB.
If a slowdown turns out to be more entrenched than expected - and inflation moves back below the ECB's target 2% rate - could the bank be forced to reverse course and cut rates again?
"The ECB has not been afraid to act when needed and it is doing so now," Financial adviser Padraic Kissane points out.
That action has seen it moving in different directions, depending on the economic environment at the time.
"If we look back for an example of decisive action, the ECB Base Rate was at 4.25% in July 2008 but from September 2008 to May 2009 it fell from 4.25% to 1%," he added.
If it has to backtrack in the face of a slowdown or very muted inflation, the ECB will do so.
In the event of that happening, having given up their tracker, the property owner will likely not be in a position to take it up again.
"Many, if not all - with a few small exceptions - will disallow a return to a tracker, so if you fix you forfeit your tracker," Mr Kissane explained.
Trevor Grant, Chairperson of the Association of Irish Mortgage Advisors echoed that sentiment.
"The decision to give up a tracker rate is not one that should be taken lightly," he said.
"It is essential that all tracker rate customers review their existing terms and avail of market-based advice from a mortgage broker. A broker can help them understand their interest rate options, and the potential implications of moving away from their tracker rate mortgage as - for most - this will mean that they will no longer have the option of reverting to their tracker rate in the future," he added.
Striking a balance
Brendan Burgess advises, as a general rule of thumb, if the tracker rate is as high as the ECB base rate plus 1.75% or more, then the product is of little value and the mortgage holder should almost certainly fix.
If the tracker margin is as low as 0.5%, they should probably not fix.
Other items, such as the remaining length of the mortgage term, need to be factored into calculations too.
If fixing, a customer is advised to make sure it's for a long enough period that either it sees the mortgage through to completion, or that there are only a few years outstanding.
"There is no point in giving up a cheap tracker to fix for two years, as you would then be faced with the higher rates prevailing at the end of the two years," Brendan Burgess pointed out.
Padraic Kissane takes a similar view, but with a slightly altered threshold for ditching the tracker.
"If the term remaining is 15 years or more and your margin is ECB plus 1.25% or less then I would stick with the tracker despite the attraction of the current fixed rates. I don't believe giving control of the rate back to the bank after the fixed period makes sense," he explained.
Mr Kissane said a 'one size fits all' approach could not be taken as there were too many variables depending on an individual's circumstances.
"It is vital to seek proper advice in relation to fixing the rate or not to establish what is the best for you and your family taking account of all the issues relevant to the question," he concluded.
