Banks chasing losses over glut of tracker deals
Anyone who has been on the top deck of a double-decker bus will probably have experienced some joker announcing to all and sundry: “I don't know what a tracker mortgage is’’.
The wag is mimicking the now infamous advert funded by the Financial Regulator that encouraged homeowners to take out a tracker mortgage.
For those who took the advice, the joke is now on the banks and building societies as they are losing money hand over fist on these home-loan products. Around half of the 800,000 mortgages in the market are trackers.
These are mortgages where the interest rate you pay is a set percentage over the European Central Bank (ECB) rate. Average tracker rates in the market are set at around 1.1% above the ECB rate. But some are as low as 0.5% above the ECB rate. The ECB reduced its key interest rate to 1% in May 2009. This means that the lucky 400,000 who have trackers have enjoyed 16 months of record low mortgage rates.
And the fortunate 400,000 will probably enjoy at least the same number of months again when the ECB rate remains at its record low of 1%. Not that homeowners with trackers will care much, but trackers are a huge problem for our banks and building societies.
Up to two-thirds of the mortgages on the books of some lenders are trackers. Permanent TSB, for example, has a large number of trackers, whereas only 20% of the residential mortgages of EBS Building Society are trackers.
Trackers are fundamentally unprofitable mortgages where the banks have no power to raise the rate. They were introduced into this market by the now departing Bank of Scotland (Ireland), with all the domestic lenders aping the Scottish bank. Lenders rushed to offer trackers in a bid to build mortgage market share. They hoped to make good the losses on trackers by selling homeowners other products like credit cards.
Take two homeowners. They have both borrowed the same amount of money, at around the same time. One homeowner got a tracker and the other ended up on a standard variable rate. The relentless rise in standard variable rates in the past few months means that a monthly repayment gap of €150 has now opened up on the average mortgage between trackers and variables. Lenders can increase the interest rate charged on standard variable rates at any time. Five lenders have imposed rate hikes on standard variables.
A sixth lender, Permanent TSB, has imposed three rises in standard variable rates since last summer. Those with standard variables justifiably feel they have been singled out for harsh treatment and are angry that they are cross-subsidising lenders who are losing money on trackers. It is estimated that between 200,000 and 300,000 people have standard variable rate mortgages.
However, homeowners with variable rates are now acting to fix borrowing costs. Now most lenders have pushed through two rises in variable rates this year, they will move again to raise rates next year.
Frank Conway, of Irish Mortgage Corporation, said standard variable rates would rise again in the next few months because of losses suffered by lenders and because of high borrowing costs for banks and building societies. He added that a rise in ECB rates would have allowed lenders to camouflage rises in standard variable rates.
Broker body PIBA (the Professional Insurance Brokers Association) said the gap was widening between tracker repayment levels and other mortgage rates.
Just because the ECB again left its key rate on hold at one percent yesterday does not mean that lenders will not move again to raise variable rates, PIBA said.
Lenders seem to be ignoring the fact that constantly hiking up variable rates is just pushing more families into arrears on their mortgages. Figures out this week showed that almost 36,500 homeowners have not paid their mortgages for three months or more.
These figures were for the three months up to June, and do not reflect the latest variable rate rises. And banks will not benefit from any move by homeowners to give up their valuable trackers. The Financial Regulator has repeatedly warned lenders not to use low-ball tactics to force people to give up their trackers. For those with standard variables the only option is to consider fixing.
Many homeowners considering this option are being quoted sky-high rates by their lenders for fixing. It is turning into a bad joke for homeowners with variable rate mortgages.