How portable is your tracker – moving your low-cost mortgage to a new home
The new ‘portable’ trackers are aimed at allowing more people to move house but they’re not without pitfalls
It’s the latest solution to the lack of supply in the property market, and is aimed at enabling the large number of people currently unable to sell up and move on, either because they are stuck in negative equity or don’t want to give up their tracker, the ability to do so.
But what are “portable” tracker mortgages, which banks are offering them, and why might you need to tread carefully?
Should I move?
If you’re on a tracker mortgage, are reasonably happy with where you live, and have no negative equity burden weighing you down, it’s hard to find an argument as to why you would move at the present time. Doing so would significantly increase the cost of servicing your loan – even if you were to avail of the drop in property prices to buy a larger or better-located property at a similar price to your own.
Take the example of a couple with a €350,000 mortgage paying interest on a tracker mortgage at a rate of just 1.5 per cent (ie ECB+1.25 per cent). Monthly repayments are now just €1,207 (total cost of funding is €84,851 based on this rate which is liable to change) but they want to move to a better-located, but similarly priced property.
So, they sell up, lose their tracker and take out a new mortgage for €350,000, but this time on a rate of 4.5 per cent. All of a sudden, monthly repayments have shot up to €1,773, and the total cost of interest over the life of the loan is €288,423 (again this is subject to change).
Looked at purely in financial terms, it seems to be a poor financial decision to make. Or perhaps it did, as banks are slowing starting to introduce products that will allow you to trade up – and hold onto your prized tracker.
How can you keep your tracker
and move on?
Earlier this month, Permanent TSB brought a new product to market, which will allow homeowners on tracker mortgages to sell up and buy another property – and keep their tracker. And it’s not the only bank to offer such a product, with Bank of Ireland, Ulster Bank, AIB, EBS and KBC Bank all either currently offering such products, or in the throes of doing so.
The main advantage of holding onto your tracker is that you get to keep your mortgage tied very closely to ECB rates, which are currently at an historic low of 0.25 per cent. Variable and fixed rates on the other hand, which are set by the bank, are now north of 4 per cent. This means that if you do move, you won’t see your monthly repayments jump by as much as they would have done in the previous example. However, they will rise nonetheless, as all the banks are applying an additional margin onto your tracker mortgage.
PTSB for example, applies a 1 per cent margin on your existing tracker rate, so if you’re currently on ECB+1 per cent, by moving house this will increase to ECB+2 per cent, for a total interest rate of 2.25 per cent. While this may be more than your current rate, it still compares very well with other rates currently on offer.
BoI and AIB both apply a similar margin on their respective products, but KBC’s margin is a little higher, at 1.25 per cent, while Ulster Bank has a different way of imposing a margin. Its margin typically ranges from 1-2 per cent over and above your existing rate, but may stretch as high as 2.5 per cent depending on the LTV (loan-to-value) of your new mortgage.
In addition to the margin, it’s important to note that the products are also only applicable for a set period of time. At BoI and Ulster Bank, for example, you can only enjoy the lower tracker rate for five years, after which you will have to switch to your bank’s variable and fixed rates which are available at that time.
At PTSB, KBC and AIB, the term may be longer, as they allow you to avail of the tracker rate for as long as the original mortgage has left to run. So, if you are only 10 years into a 30-year term on this mortgage, you can avail of the lower tracker rate on a new mortgage for another 20 years. If, however, you only have three years left to run, the lower tracker rate will only apply for this period.
Another point to note is that typically the new tracker will only apply to the amount outstanding on your original tracker mortgage loan. So, for example, if you have €350,000 outstanding on your mortgage and you trade up and borrow again for a similar amount, you will get the full benefit of the product. If, on the other hand, you’re trading up and your existing mortgage is for €200,000, but your new homeloan is for €350,000, you will have a type of “split” mortgage, whereby €200,000 will be charged interest at the lower tracker rate, with interest on the remaining funds levied at either a variable or fixed rate.
What happens if I’m in negative
equity as well?
If you feel that you are “trapped” in a property that no longer suits your needs but are hesitant to move because of the costs of doing so, a portable tracker might help ease your situation. While you will still have to carry any shortfall arising from the sale of your first property onto your new mortgage, being able to get some of the benefit from your old tracker rate should help ease the burden.
All the banks that offer portable trackers also offer solutions to those in negative equity, allowing you to bring your tracker rate – as well as the shortfall arising from the sale of your house – to your new mortgage.
However, whether or not you will be eligible for this will depend on the scale of negative equity you find yourself in.
At BoI for example, the new LTV of the combined loan should be no greater than 175 per cent, or 125 per cent for self-builds. So, if you’re carrying €100,000 in negative equity onto a new mortgage of €350,000, based on a market value of €400,000 you will have a LTV of 112 per cent, which would be within the limits.
Ulster Bank allows a maximum LTV of 200 per cent, while PTSB looks for the new LTV to stay below 175 per cent.
What’s the catch?
In an ideal scenario, whereby you sell a property and purchase a new one within a short period of time, transferring your tracker – whether you are in negative equity or not – should not be a major problem.
However, problems may arise in a not-so-ideal scenario – and given the heady state of the property market in some parts of the capital, combined with the difficulty involved in selling a property in other parts of the city and country, it would be foolhardy to discount the probability of delays.
At PTSB, for example, once you sell your existing property you will have six months to complete the purchase of your new property in order to avail of tracker portability. Fail to meet this deadline, and you will be stuck with a variable or fixed rate. This is not so problematic if you’re not in negative equity, but potentially extremely challenging if you are.
For example, with such a transfer, you will also be required to sign a shortfall agreement, which commits you to repaying the negative equity. If you successfully complete your purchase of a new home within the six months, this shouldn’t be an issue, as the shortfall will be added to your overall mortgage, and will be repaid each month.
However, complications might arise if you find yourself unable to do so. In the case of PTSB, for example, if you don’t complete within this time period, the full shortfall amount becomes due. While the bank asserts it expects most customers will be able to meet the six-month timeline, if they don’t, it says it will examine the situation on a “case-by-case basis”.
KBC gives just four months for the transaction to be completed in order to transfer a tracker, but notes it doesn’t have a time restriction “at the moment” on carrying the mortgage. During this time, any outstanding balance on their original mortgage will be charged interest at the existing tracker rate.
Best to tread warily, however, in case you find that you are out of your home and on the hook for your negative equity, which could be as little as €5,000 or as great as six figures.