Cliff Taylor: Tracker mortgage scandal hinges on key moment

The tracker mortgage scandal has been close to a decade in the making. The key moment was the decision by the banks to stop offering tracker mortgages to new customers, in most cases around the end of 2008.

The banks used the disappearance of trackers from the market to deny those moving off fixed-rate loans the option of returning to rock-bottom rates.

The typical borrower caught up in this took out a mortgage sometime in the 2002-2008 period and entered a fixed-rate arrangement around 2006 or 2007 when European Central Bank interest rates – and the tracker rates – were heading upwards. The fixed-rate term was usually for two to three years, though some were for up to five years.The fixed-rate arrangement thus ended after the banks stopped offering tracker loans.

Many of the people going on to fixed rates were on deals which said that when their fixed-rate period was over, one option open to them would be to return to a tracker, though the precise rate at which they they would return was often not specified.

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In other cases, borrowers were allowed to break out of by-then-expensive fixed-rate contracts without an up-front penalty, but were not told that this would mean losing their tracker.

Individual twists

There are many different individual twists – for example, related to people moving house, or moving their mortgage – but the bottom-line argument in most cases is the same. Did banks have an onus to offer low tracker rates to customers coming off fixed-rate products, when they had discontinued offering these products to new borrowers?

This was a crunch that no one saw coming. Nobody had the slightest idea that ECB rates were going to collapse from 4.25 per cent in summer 2008 to just 1 per cent the following April. Trackers moved from being expensive for the borrower to become a crippling cost on lenders who were by then in deep financial trouble.

What followed was a concerted attempt by banks to get as many people as possible off tracker rates. The argument they used is perhaps best explained by correspondence between AIB and a borrower, seen by The Irish Times. AIB customers taking fixed rates had typically been told that the options when the fixed-rate term ended would be: to go on to the standard variable rate; to go on to a new fixed-rate arrangement; or to go on to the tracker rate.

The central thrust of the letter is summed up in one sentence: “Upon drawdown of your mortgage account, the bank was not in a position to inform you that you would not be able to avail of a tracker rate upon expiry of your fixed interest rate period, given that tracker rates were still on offer by the bank at this time, not having been discontinued until 10th October 2008.”

On such logic lies the banks’ defence.

Court challenge

Details differ at other banks, but the basic issue is the same. The scandal first came to light when Permanent TSB – then Irish Life and Permanent – went to the High Court to fight 2010 rulings by the Financial Services Ombudsman in cases where it had not informed people leaving fixed-rate arrangements early that this would involve them losing their tracker rights.

The bank lodged an appeal to the Supreme Court but dropped it as the Central Bank launched its investigation.

Ulster Bank letters typically offered customers the option of returning to a “home loan” rate – but was that a standard variable or tracker rate? In many cases, banks interpreted the requirement to offer a tracker for people coming off a fixed rate as allowing them to offer a much higher margin over ECB rates then the original product.

We have seen letters offering tracker rates of 3.5 percentage points or more over ECB rates, a multiple of the original tracker arrangement.

The borrowers’ right often come down to the detail of what was written in the terms and conditions of the original loan, or the facility letter signed by the borrower.

The Central Bank's update this week shows that, despite having clearly breached consumer entitlements in many cases, a number of banks are still delaying in putting this right and arguing the toss in terms of many of the outstanding cases. As Central Bank governor Philip Lane put it at the Oireachtas joint committee on Thursday, there has been a culture of interpreting contracts "in favour of making their own profitability higher to the detriment of customers".