Welcome to this, our first On The Money consumer finance newsletter of the new year.
Hanging on to your tracker mortgage rate has been a mantra for a generation of Irish homebuyers. Those fortunate enough to have secured a tracker in the heady days of the Celtic Tiger were looked on with envy as European interest rates fell to historic lows in the wake of the financial crisis.
It’s astonishing now to think that trackers were only a feature of the Irish home loan market for fewer than seven years. Fourteen years after they were rapidly phased out by banks facing a cash crunch, they still account for just over a third of all loans on principal private dwelling – family homes in other words, as against investment properties.
The well-documented attempts by the banks – stuck with loans that they assiduously marketed only a short time before but on which losses now loomed – to hoodwink and cheat people out of access to such rates has proved an expensive exercise in terms of reputation, compensation to abused customers and record fines from the Central Bank. Given the scale of the scandal, it was clearly a systemic issue for the banks and indicative of just how badly they had mispriced these loans and their arrogance in how they viewed relationships with their customers.
The reporting and commentary around the scandal reinforced for many the notion that they should hold on to their tracker loans at all cost. But has the tide now turned?
With the European Central Bank moving to increase rates from last summer for the first time in 11 years, we have started to see a number of financial advisers make the case for tracker mortgage customers to consider whether they should move away from those rates to other fixed mortgage rates available in the market.
That’s been a bit of a culture shock to the 243,500 or so people who have got used to being able to not having to assess their mortgage position for over 15 years, secure in the knowledge that they were on to the best deal available in the market.
And it hasn’t been helped by some very fast and loose use of figures to make the case.
This week it was stated that the average term left on an Irish mortgage is 15 years with an average outstanding balance of €132,000 and went on to assure tracker loan customers that they could save upwards of €5,500 by switching now to the best fixed rate in the market. These are Central Bank figures so they are not wrong per se but they are not really relevant to tracker mortgage holders coming to terms with significant rising mortgage costs.
Figures available from the Central Bank show that, as of last September, the average outstanding balance on an Irish tracker loan on a family home was just under €81,500.
And given that tracker mortgages were phased out over 14 years ago – the last products were pulled in October 2008 – the average term outstanding on tracker mortgages is certainly below 15 years. All of that affects the figures.
A back of the envelope calculation shows that, even with 15 years left on your loan and using the best fixed rate quoted in the study earlier this week of 3.17 per cent, the average tracker mortgage customer would save a maximum of just over €3,300. If you assume the average length of time left on such loans is a more realistic 13 years, that figure drops to slightly over €2,800.
And that’s before the legal and valuation costs incurred in switching which would amount to €1,500 or more. So yes, savings are possible but more modest.
For those on lower tracker margins – and there are many – any saving disappears as of now.
Yes, ECB interest rates are certain to rise further but so are Irish banks fixed and variable rates. Lenders here have largely kept rates stable despite the EU-wide increases, something they can afford to do as they are now being paid interest on the substantial amounts they lodge with the ECB compared to the first half of last year when they were being charged for the privilege.
But that won’t last forever and the betting is that fixed and variable rates will rise in 2023.
It’s also worth remembering that the market leading rate cited in calculating savings is a four-year rate after which homeowners will be moving to fixed or variable interest rates that may well be higher again. They certainly will not be able to return to their tracker.
So is it worth abandoning your tracker? There is no “one size fits all” answer. It depends on how much you owe, what interest rate you are currently paying, what alternative rates are available to you at the time you are considering the issue, how long is left on the loan and the future direction of interest rates. Everyone will need to crunch the numbers themselves and they would be well advised to consult a professional mortgage adviser as part of that, given a home loan is generally the biggest financial commitment for any homeowner.
They’ll also need to make their own assessment of the future trend for interest rates. The only information I can add is that, before the financial crash in 2008, the ECB were over 3 per cent more than under that rate – going as high as 4.75 per cent briefly. That doesn’t mean they’ll definitely return to those levels but the signals from the ECB are that the 3 per cent level at least is very likely to be hit in the first half of this year.
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