Tracker vs Standard Variable - need for balanced debate

[Gerard123]

A lot has and continues to be written and spoken about regarding tracker rates on mortgages, and how they are being 'subsidised' by standard variable rate mortgages.

The frequent suggestion is that people on tracker mortgages are in some way privileged, indeed at times portrayed as if they have in some way got an unfair advantage or, at an extreme perhaps there is something ‘devious’ in having cheaper tracker mortgages, and are being unfairly ‘subsidised’ by those on standard variable rates.

Much of the debate and discussion is misinformed, biased and skewed. It is long after time that some balance was brought back into the discussion and better context given to the discussion and debate.

Many of the people on trackers bought property in the 2004 – 2008 time period when trackers were available, and paid boom time prices for their house, and huge amounts of stamp duty.

To bring some context and a better understanding consider the following real life example of two neighbours:

Identical house, 25 year mortgage, assume same deposit paid (€120,000)

House 1 (purchased 2008, cost including stamp duty €1,252,000. Tracker rate 1.5%)

House 2 (purchased 2011, cost including stamp duty €580,750. Standard Variable rate 4.5%). (Note: a 51% reduction in the price, excluding stamp duty paid)

Repayments:

House 1 Tracker - €4,525 (monthly). €1,357,500 (Total payments over 25 years).

House 2 SVR - €2,560 (monthly). €768,000 (Total over 25 years).

Having considered the above which mortgage would you prefer to have?

For the identical house (next door!) the tracker is costing two thousand euro extra per month in cash terms. (Were the tracker not available the monthly payment of the bigger mortgage would be €6,300 on 4.5% standard variable, €3,740 per month more than house 2).

So on reflection and analysis, perhaps many of those holding tracker mortgages are not so ‘fortunate’ after all. I am sure one would very gladly switch to the standard variable at 4.5% if given the opportunity to buy the house at €550,000 second time around. It would be easier to sleep at night not having to worry about coming up with two grand extra per month nor worry about the negative equity.

And you would not have to worry about the Government, Regulator or perhaps a smart banker attempting to find a way to remove trackers or seek to penalise tracker holders (as has been suggested with a levy on trackers, for example).

And please don’t say that the above example is an extreme example. Many thousands of people are in very similar situations, though their numbers may be different the underlying situation and context is the same.

Tracker holders bought, organised their finances via trackers, and got on with life. No different to those who bought more recently on standard variable rates. They adhered to the rules and regulations in place at the time of purchase.

Why seek to change the rules retrospectively and add further misery to many of those who bought at high prices?

Many (a majority??) of the so called ‘lucky’ and ‘fortunate’ tracker holders bought at a time when house prices were high by today’s prices, and also suffered high stamp duty rates. Yet frequently the debate is set up on ‘them vs us’ lines (SVR vs tracker), a divide and conquer approach?

This is not a request for sympathy, perhaps empathy, and to facilitate a more reasoned and logical discussion on the tracker vs standard variable debate.

Moral of the story?

Maybe many of those with tracker mortgages are not so 'lucky' after all!!

Oh yeah, and people on trackers also have to pay property tax despite already having paid vast amounts of property tax upfront (aka stamp duty).

 

[monagt]

Perhaps you could also mention the very long durations of some of the Tiger mortgages which exacerbates the extra amounts paid back.

The remark on the huge property tax paid upfront (aka stamp duty) is also very relevant to the debate.

IMHO, the bankers want rid of the trackers for their own reasons and not to benefit current/future mortgage holders.

 

[Gerard123]

Good additional points. If theoretically trackers were eliminated all that would happen is that the related mortgages would see rates increased dramatically, standard variable rates would not show any significant decrease, banks would simply up the rates for the tracker holders.

In my view, this talk of standard variable rates subsidising trackers is a side show and a diversion by interested parties, or contributors who are taking a very narrow view of the situation, without looking at the bigger picture for borrowers, context, relative house prices, timing of purchase, etc.

Re the cost of banks providing trackers - there is a need to understand banks costs of funds, mix, etc. Correct to say they are not as profitable as standard variable rate mortgages.

Critical issue is that tracker holder are supportive and defensive of their trackers.

 

[elcato]

The problem is that there are people in the middle who went on fixed for various reasons assuming they would get their tracker back. So it's not a straightforward 'us against them' scenario.

 

[Brendan Burgess]

Hi Gerard

You are conflating a lot of factors here. There are 4 rough categories of people in the following order of difficulty

1) People who bought at the peak with a Standard Variable Rate mortgage
2) People who bought at the peak with a cheap tracker
3) People who bought outside the peak with a SVR
4) People who bought outside the peak with a cheap tracker

(There is a sub-category of 1) who had a tracker, but who lost it)

I would be very annoyed if I was in category 2) and I was asked to give up my tracker to help out the SVRs in some way.

But the bigger issue is that the SVR is probably around 1.8% higher than where it should be. They should be campaigning to get it reduced. Then the difference between the tracker and SVR would be a lot less pronounced.

 

[Brendan Burgess]

Repayments:

House 1 Tracker - €4,525 (monthly).

House 2 SVR - €2,560 (monthly).

Hi Gerard

You are making a number of big assumptions which show the difference at its maximum.
House 1 purchased at the peak
House 2 purchased at the trough
Tracker mortgage was 1.5% - the average is around 1% , and are as low as .55% (ECB +0.5%)
No TRS

Against that, some SVRs are lower than 4.5%.

Even with these assumptions, I get different figures from you.

If we keep your peak purchases assumptions, but adjust the interest rate to 1%, the difference falls to €1,500.

I did a post on it last year, which showed that someone buying at the peak with a tracker was better off that someone buying in September 2014 with an SVR.

Is someone who bought at the peak with a tracker better off than someone buying now?

I concluded that the buyer at the peak had lower repayments. I used prices of €549k vs. €390k , a drop of only 28%. Not sure where I got the €390k figure. I wonder would it have been the average Dublin house price?

 

[Delboy]

People on Trackers have a contract with the Bank. As long as they are paying theie Mortgage, i.e. honouring their contract, that should be that. No need for debate on this one.

People on Trackers, SVR's or Fixed Mortgages who are not paying their monthly mortgage bills have not fulfilled their contract. And yet, all we hear is about Banks going to get called in before Dail committees to explain why more debt writedowns/deals haven't being handed out to these people, etc etc i.e. the Banks should take a hit.
And if you mention the 'R' word, your no better than Cromwell.

To me it's obvious where the focus should be in the high SVR debate! But it's not PC to go with it

 

[Gerry Canning]

People on Trackers have a contract with the Bank. As long as they are paying theie Mortgage, i.e. honouring their contract, that should be that. No need for debate on this one.

People on Trackers, SVR's or Fixed Mortgages who are not paying their monthly mortgage bills have not fulfilled their contract. And yet, all we hear is about Banks going to get called in before Dail committees to explain why more debt writedowns/deals haven't being handed out to these people, etc etc i.e. the Banks should take a hit.
And if you mention the 'R' word, your no better than Cromwell.

To me it's obvious where the focus should be in the high SVR debate! But it's not PC to go with it

Delboy;
I think a lot of people actually do not have an issue with the R word.
We all know there are a number of leg lifters out there and they make a lot of noise.
People on SVR are undoubtedly being hammered by Banks , I think it is reasonable to support them.
I do appreciate some dead wood will attach to genuine SVR case!

 

[STEINER]

All of these buyers had one thing in common, they each freely made a decision to sign a mortgage contract and purchase a property. The 4 categories of people here have a tracker or a SVR mortgage as a result of what they themselves agreed.

As a FTB I was fixed for 2 years and then choose tracker rather than SVR. I was happy with agreeing to a tracker at the time, regardless of the potential rises or falls in the ECB rate. I knew that if the ECB rose, my repayments would rise and vice versa. If the ECB rate was 4% now, yes my repayments would be higher, but I freely choose that tracker mortgage.

I didn't want an SVR that the bank itself could vary, so I didn't choose it. Regardless of what rates are, SVR mortgage holders entered into a contract knowing what SVR means, ie at the bank's mercy effectively, subject to market competition

 

[Gerard123]

Thanks, interesting comments. Inevitably different figures will produce different results. Appreciate the different categories but tried to keep it simple. One figure I would like to know is what percentage of people with trackers today bought in the period say 2004 - 2008. My sense is it would be high, if that is the case then I believe my logic is ok. Any ideas on where one might get this?

You didn't take the deposit off of 120k - for simplicity you need to assume the same deposit (the deposit was 10% of the initial house so it is logical to take the same amount else not comparable). The deposit should explain the difference - the mortgages amounts are €1,132,000 and €460,750.

I note you use the word assumption as regards my analysis, I didn't use assumptions, its genuinely a real life case. The house bought in 2008 had already experienced a significant drop from the peak so it was not bought at the peak, though it continued falling so with hindsight......

My main theme was that many of the people on trackers would be the very same people who bought in the era of peak'ish prices and when everything is factored in for may of the same people they are not better off financially. And that ignores negative equity of course.

Agree that SVRs are out of line with other countries, however I don't like the comment that frequently arises that trackers are being subsidised by SVR'ss, its missing the point that SVRs are too high in the first place, but its an easy diversionary tactic by the banks.

ps - I took a look at your earlier analysis in the link you provided, hadn't seen that before. I think there is a flaw (overly simplistic approach maybe is a better word?) in the analysis which then drives a conclusion which is not entirely logical. You compare a 30 year tracker mortgage with a 22 year SVR mortgage. Of course taking 8 years off a mortgage will massively drive up monthly payments and make it appears the svr mortgage on the lower house price is more expensive. Rationale seems to be that the person was renting 8 years already so would have paid rent. Bit too simplistic though to simply recalculate over 8 less years. (Though as I said above all depends on what numbers are used, etc).

Also I reverse engineered your calculation - 590k @1.25% (say), 30 years - monthly repayment €1,965 approx. Reverse engineer, €1,965 monthly, rate 4.5%, over 22 years derives a mortgage of €330k. A 44% reduction in price (100% less 330/590) which makes more sense to me and seems more in line with what actually happened in the market, give or take.

As a final analysis, if one assumes a 25 year mortgage, comparing tracker of 1.25% vs SVR 4.5%, the point at which the monthly repayments are the same is where house prices are 28% lower. In other words, a 25 year, 1.5% tracker mortgage has the approx same monthly repayments as a 25 year, 4.5% svr mortgage, if the latter mortgage is 28% lower at the start. An interesting stat to end with!