I currently have a PTSB ECB +1.3% tracker, 17.5 years remaining with an outstanding balance of €121,640. My monthly mortgage repayments have increased by €300 per month since July 2022, since the ECB started increasing the interest rates.
I’m aware my tracker is not the best margin out there and I’ve received approval in principal for Avant One Mortgage, keep my repayments as they are now will reduce my term to 15 years.
It’s such a tough decision. I am single with a good secure job €60,000 per annum. It seems like a long time to be fixed for but the certainty would be nice. Also, what would happen if Avant left the Irish market like Ulster Bank and KBC did?
Ms I.C.
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It is a tough decision, you’re absolutely correct. You are being asked to take a punt on the direction of interest rates over the next 15-18 years and I can assure you even the folks at the European Central Bank would not be held to a call like that. It is the conundrum facing many homeowners.
A study I came across recently gives a little insight into the position and behaviour of mortgage holders as rates started rising – my thanks to Mark Coan at MoneySherpa for pointing me in its direction.
Three Central Bank economists – David Byrne, Fergal McCann and Edward Gaffney – produced a paper earlier this year on the interest rate exposure of mortgaged Irish households. It says that of 293,000 mortgage borrowers who were identified as having variable rate loans at the end of 2018 – a group that includes tracker mortgages – a quarter had moved to a fixed-rate product by the end of last year by which time ECB rates had already jumped by 2.5 percentage points dramatically increasing payments for people in your position.
Another quarter had paid off their loan entirely with the rest, close to half, remaining on their variable rate loans. Of those, just under 60 per cent were on tracker rates.
So you are far from alone. According to the figures derived by MoneySherpa from that report, just under 171,000 tracker mortgage accounts remain active.
As your example shows, the lazy assumption that all new trackers ended in 2008 and those borrowers are thus close to finishing their payments is not entirely accurate. Some lenders did accommodate people moving houses allowing them to retain or even extend the terms of their trackers.
The same Central Bank reports that just 5 per cent of all mortgages were fixed for longer than five years at the end of last year, with another 55 per cent of all home loans fixed for shorter periods, so 15 years is certainly an outlier but it does, as you say, give certainty.
Published in April, it is interesting that their upside scenario was that rates would jump by 4.25 percentage points between June 2022 and the end of this year (their best case scenario was for a more modest 3.5 percentage point rise – which accounted for the rate rises imposed at the time of their report).
In the event, as we know, interest rates have jumped by more than the report considered and are now 4.5 points higher than they were back in June last year before the European Central Bank.
Even within their parameters, they saw interest rates rising by an average of 16 per cent across all mortgages in their worst case scenario with people on trackers who had significant time outstanding on their loans seeing payments jump by around 50 per cent. That is pretty much in line with your scenario.
Looking forward
So what now? Will rates fall and make your tracker better value? And should you wait to take a punt on that?
Rates will definitely come down; the only question is when. The current thinking is that the ECB has finished raising interest rates in the current cycle after a record-breaking 10 successive increases. But that doesn’t mean they are planning on cutting rates yet. The message out of Frankfurt is very much that more evidence of inflation being brought under control is required before rates start to come down.
On that basis, we are likely to be well into 2024 before we see any rate cuts. How low they go and over what time period is anyone’s guess. I was looking at the figures from three highly experienced finance houses recently and they varied wildly on timing and extent.
You don’t tell me the rate Avant is offering you but they seem to be offering 3.95 per cent on long-term fixed loans for loans of 60 per cent or less of the property value from the less-than-transparent rate card that I see on their website.
With your tracker having a 1.3 percentage point margin over the ECB rate, you are currently paying 5.8 per cent. So you will need ECB rates to drop substantially – by close to two percentage points – to be competing with that. I’m not saying that cannot happen but people who know a lot more than I are suggesting the ECB will be cautious in lowering its rates when it does start the rate-cutting cycle.
It’s also worth noting that the recent ECB rate cycle – more or less since the shock of the financial crash – has been exceptional. Before that, ECB rates tended to sit somewhere between 3 per cent and 4 per cent. There’s no certainty it will revert to that but it’s the only guide we have to hand.
The other point to remember is that Avant’s offer also shortens the term of your loan – and that’s significant.
As you say, you will end up paying more or less the same amount per month, so there is no going back to the halcyon days of your pre-July 2022 tracker repayments, but you will be saving money over the long term. If your tracker rate was to remain as it now is and you kept going for the 17 and a half years, it would cost you over €70,000 in interest.
It won’t of course; the rate will come down but let’s assume it averages 4 per cent over the remaining life of your loan. That would still cost you close to €50,000 in interest. Because you are paying the Avant loan off over a shorter 15-year window, you will save close to €10,000 on that – money that could come in useful at that time in your life.
If Avant agreed, you could always just move to its fixed rate without shortening the term. While that would not save you anything over the long term, it would cut your monthly payments by around €120.
On the basis of your income and not knowing your full financial circumstances, the current Avant offer should cost you just over a quarter of your after tax income, which is ballpark what we would expect for a mortgage – some people are currently paying considerably more. And, as you say, you have the comfort of knowing your job is secure and, presumably, your pay will rise over the coming years.
So the Avant offer seems affordable and does give you certainty. Whether it is better over the 15 years, only time will tell. And while ECB rates – and your tracker – will certainly come down over the next few years, there is nothing to say we would not have another rate-rising cycle at some point between now and 2040 when your current loan will be paid off.
Finally, what happens if Avant exists the market? We’ve plenty of real-world evidence of what happens in these circumstances from the recent departures of Ulster Bank and KBC from the Irish market. In both cases, the banks buying their mortgage loan book have been obliged to honour customers’ existing terms.
There’s no reason to think Avant is going anywhere but if they do and if you have a 15-year fix with them, whoever takes over the loan will be obliged to allow you to continue with those terms unless you seek to alter them yourself.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice
