Any chance of Banks "wriggling out" of trackers ?

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Tailspin

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Tailspin - does your contract with BoI go on to say "In the event that, or at any time, the Repo Rate is certified by the Lender to be unavailable for any reason the interest rate applicable to the Loan shall be the prevailing Home Load Variable Rate"? Also do you have a clause 6(c) which talks about EURIBOR?

I read a BoI contract for a friend last week and will post a more detailed note later today. Just curious if you have the same wording.
Hi Peter,

Yes, both parts are in my tracker contract. My reading of "unavailable" is that if for some unforeseen reason, the ECB actually ceased to operate, or was restructured in some way as to cause it not to actually quote a repo rate. I don't think our circumstances now qualify as this rate is available.

Clause 6 (c) states "notwithstanding anything else provided in this Offer letter letter, the varied applicable interest rate shall never, in any circumstances, be less than 0.1% over one month's money at the Euro Inter Bank Offered Rate (EURIBOR).

Does this clause in any way contradict the Special conditions regarding the repo rate? Can anyone explain what it means in plain English - have looked up one month Euribor and it is currently 0.4% (with 12 month at 1.226%). If there is any contradiction here, this was certainly never brought attention to me.
 

OakesP

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Tailspin, way back in February 2008 the 1 month Euribor was 4.239%. The ECB was 3% (having not moved since June 2007). I am quoting the rates as per the relevant weblinks in my previous posting.

The wording of clause 6(c) is “Notwithstanding anything else provided in this Offer Letter, the varied applicable interest rate shall never, in any circumstances, be less than 0.1% over the one month’s money at the Euro Inter Bank Offerred Rate (Euribor).

Let's assume someone has a 0.8% plus ECB tracker. As at February 2008 the interest rate paid by the borrower would have been 3.8%. At the same time clause 6(c) appears to say that the applicable rate would have been 4.339% (Euribor plus 0.1%). It seems to me – but I could be reading this wrong – that the borrower was underpaying an amount of 0.539% pa during the time this divergence existed.

Today the ECB rate is 1% and the last daily Euribor 1 month amount was - as you point out - 0.405%. In these circumstances clause 6(c) cannot kick in.

I cannot imagine a bank seeking to claw money from a borrower for short term divergences which make clause 6(c) operate. I have not looked at the historical differences to perform an overall plus or minus figure. I don't see any need to at this time. I just wanted to raise the issue about fine print in contracts which seek to oust the upfront special conditions which banks draw our attention to (as opposed to the fine/small print).

Peter Oakes
 

Tailspin

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Thanks Peter, this helps. By the way, if Euribor rates are falling as they seem to be, does that reflect a reduction in risk over time in interbank lending? What do you think Bank of Ireland cost of funds would be? Is it possible that over the next couple of years, that BOI's cost of funds might revert back towards the ECB rate, and allow banks to make a very modest margin on this lending?
 

MentalNote

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I think this is pretty much a re-hash of what has already been said int his thread.

IrishTimes said:
MORTGAGES: Financial institutions say they are losing money on tracker mortgages, and could try to force borrowers on to higher rates, writes FIONA REDDAN

IT HAS BEEN A turbulent time for homeowners. On top of collapsing house prices and negative equity, mortgage holders are also facing interest rate hikes. Last year people who were on fixed-rate mortgages were stuck paying the price of high interest rates while, more recently, those on variable rates have found themselves staring down the barrel of higher repayments.
Now, those with tracker mortgages are starting to look nervously at the terms and conditions of their loan documentation, fearful that banks may look for “get out of jail” clauses to rescind these attractive products.
“Banks are looking for every chance to get out of tracker mortgages,” says Frank Conway, a director with the Irish Mortgage Corporation. That sentiment is echoed by Karl Deeter, operations manager with Irish Mortgage Brokers, who says banks are starting to “either increase inducements or look for loopholes” to escape their trackers.
There is no doubting the attractiveness of trackers for homeowners – repayments on a €300,000 mortgage over 30 years cost €231 less a month on a tracker (ECB plus 0.75 per cent), compared to the standard variable rate (3.23 per cent). As Deeter notes, trackers offer a price promise, “something rare in this day and age”.
Bank of Scotland, which introduced tracker mortgages into Ireland, is offering borrowers more than €1,000 if they switch lenders and the expectations are that the other lenders may introduce similar incentives, or look to invoke a clause in borrowers’ contracts which would let them switch people on to more expensive rates.
The banks argue that trackers are uneconomical because they now have to borrow funds at a higher cost than they are lending them out at (to those on tracker mortgages). Although three-month Euribor rates (the rate at which banks themselves borrow money) have fallen dramatically from their highs of 2008, down to nearly 0.5 per cent, “very, very few banks are able to fund themselves at Euribor”, says Oliver Gilvarry, head of research with Dolmen Stockbrokers. Irish banks in particular pay considerably more for funds.
Gilvarry adds that trackers look expensive when compared with deposits, given that banks are sometimes paying as much as 3 per cent for deposits, while lending out trackers at about 1.75 per cent (ECB plus 0.75 per cent). He also notes that banks pay very little interest on funds deposited in current accounts, so there could be a substantial margin on what they make on these funds, and what they lend out in trackers. So, the banks’ argument that trackers are costing them too much might be misleading.
Nonetheless, speculation is mounting that the banks may step up their action on trackers. According to Deeter, the most likely action banks might take is on the loan-to-value (LTV) covenant inherent in many tracker contracts. If, for example, you got your tracker on the basis that you had an LTV of 80 per cent, whereby the mortgage represented only 80 per cent of the value of the property, the bank could look to switch you on to a higher rate. They would do this saying that because of the decline in house prices, your LTV may now be closer to 100 per cent, and so you might no longer qualify for the lower rate. “It won’t be fair, but it would be a fair argument that they could present,” says Deeter.
And don’t think that administrative issues could stop the banks from requesting new valuations of properties on their loan books. “If I was a banker, I’d say, we’ve looked at property prices in your area, we think they have declined by 40 per cent, we’ll give you three months to come back to us with a valuation,” says Deeter. “The banks will offset the work on to the individual.”
If the banks were to go down this route, homeowners would then have two options: either inject a lump-sum to pay down the mortgage to the required level and stay on the lower tracker rate, or be switched to another rate, which would probably be a tracker in a higher LTV band.
While Conway believes most tracker contracts are “very tight”, and thinks it unlikely banks could look to change their terms and conditions, he warns that homeowners might nonetheless “open up their own vulnerability”.
“Homeowners should remember that they needn’t provide the banks with any reasons,” warns Conway. For example, if you look to extend an interest-only period, the bank may only do so if you give up your tracker.
“The bank will say ‘we’ll renegotiate’ but will do so out of the tracker mortgage,” says Conway, citing the example of an investor who was given two options by the bank when he asked for an extension of an interest-only period: either switch to a fixed or variable rate and pay interest only, or stick with the tracker but pay both interest and capital.
Homeowners looking to rent out their property should also be aware that this may come at the cost of their tracker, because banks may look to switch such customers on to investment property mortgages. Given that such rates now start at more than 4 per cent, it would mean a dramatic increase in funding costs for those on trackers, so those interested in becoming landlords should first check the terms and conditions of their mortgage contract.
Not only that, but any violation of the mortgage contract, such as going into arrears, or allowing a life assurance or home insurance policy to lapse, may give the bank reason to move on your tracker.
And, if you’re looking to top up your mortgage, you might find that the bank will take the opportunity to draw up a new contract and move you off the tracker rate. Instead, ask the bank to set it up as two different loans – so you won’t lose your tracker rate on the older part.
Remember that if you’re eyeing up some of the deals available on properties around the country, moving house will mean you will lose your tracker, as your mortgage ends with the sale of the house.
For homeowners interested in availing of incentives such as the Bank of Scotland offer to switch, the advice is to think carefully. “You shouldn’t give up your tracker unless you have a really strong argument for doing so,” says Deeter, while Conway urges homeowners to “protect it at all costs”.
While it is expected other lending institutions might follow the Bank of Scotland and incentivise mortgage holders to leave their books, the issue remains as to which bank will take them on.
With so many borrowers in negative equity, and LTVs of more than 100 per cent, there simply “mightn’t be anywhere for them to go”, says Conway.
 

eltel1979

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Irish Independent 4th May:
Borrowers warned to reject €15,000 offer to quit trackers

BANKS desperate to clean up their balance sheets could soon start trying to tempt mortgage holders to go elsewhere by offering them up to €15,000 off their home loan.
But consumers have been advised not to touch these "break-deals" unless they are offered more money.
The IBA said lenders were quietly trying to protect their capital by tempting borrowers to switch to other providers.
Paul Kinane of the IBA said lenders were particularly keen to get people to give up trackers, which are loss-making for them.
"Not only do many banks no longer want new customers, some don't even want their existing customers anymore," he said.
This situation could lead to a borrowers' market, in which mortgage holders will be able to negotiate lucrative deals with their banks in return for ending the relationship.
But Mr Kinane warned: "Consumers need to be extremely vigilant as experience would indicate that you get nothing for nothing as far as the banks are concerned."
He said that a homeowner with a €300,000 variable rate mortgage may be tempted by having 3pc to 5pc of this loan written off, which would amount to a discount of between €9,000 and €15,000.
The IBA said it believes tracker customers would need a break-deal offer above 25pc (€75,000 on a €300,000 mortgage) to make it worth their while. He said that customers who dealt directly with the banks could have significant pressure brought to bear on them to change their terms.
"We are urging mortgage holders not to feel pressured into changing their loan terms or switching to another provider. People should see this as an opportunity to perhaps secure a better deal in the market," Mr Kinane said.
Switch
He dismissed a recent offer from Bank of Scotland/Halifax of €1,000 to those who want to switch away from the bank as a "low ball offer".
The bank is closing and will no longer offer top-up loans, prompting it to advise customers with a valuable tracker to switch the entire home loan to another lender to avail of a top-up.
"It is likely to be the start of similar campaigns, particularly from those lenders keen to exit the Irish market.
The Consumers' Association has called on the Financial Regulator to carry out a probe of mortgage lenders to make sure they are not attempting to encourage homeowners to give up tracker mortgages.
The association's chairman, James Doorley, said lenders were under a statutory obligation, under the regulator's consumer protection code, to act in the best interests of customers. This meant that any attempt to incentivise customers to give up their tracker would be a breach of the code. Lenders are attempting to get people to give up their trackers when they get into arrears and need to restructure their mortgage.
A spokeswoman for the Financial Regulator has also said that lenders were required to act honestly and in the best interests of customers.
"Our firm view is that no bank should offer incentives for tracker mortgage customers to switch to less favourable options," she said.
- Charlie Weston
Irish Independent
 

Carmel

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reason to give up your tracker

Hi Deelrover
I am in that situation. We have a tracker at ESB plus 0.51% at the moment, but have a second child on the way and feel that we need to move house to get more space. I changed job last year and improving my commute would also be a consideration. But the thought of losing our tracker is a major factor in putting off the move.

I had thought that my existing mortgage lender might be willing to offer a good variable rate on the next mortgage if I tried to negotiate on the basis that we would be giving up the tracker, but perhaps that doesn't make sense if the tracker will be paid off at the lower rate anyway if the house is sold?

Would we be crackers to give up our tracker?

C
 

deelrover

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Carmel, Same issue's as you have with growing family. Mortgage with UB,thye were only too happy when I went in to them about moving house and having to re apply for a new mortgage. Only variable and fixed rate mortgage offers so even though the cost of upsizing was only 50K we decided against it for the while due to the loss of the tracker mortgage.
 

Howitzer

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I think this is pretty much a re-hash of what has already been said int his thread.
http://www.fxcentre.com/news.asp?2596092

While some of these offers appear very attractive in the current climate, we would urge caution and suggest seeking independent financial advice before considering any offer from your bank. A E300k variable customer may be tempted by a 3pc-5pc (9,000-15,000) discount, but we believe that trackers customers would need a break-deal offer north of 25pc to make it worth their while. This is often a difficulty when customers deal directly with the banks as significant pressure can be brought to bear to change their terms. Because of their experience in and knowledge of the area, brokers often negotiate much better deals that those originally offered
Just to note that the advice given in this link comes from the Irish Brokers Association. Whilst it's correct to say that the offer from Halifax/BOS is a terrible, self serving low ball offer the advice from the IBA isn't much better.

Some of the mortgage brokers on the site may correct me but it's my understanding that if a mortage brokered by a member of the IBA is paid off early / switched, then the commission paid out to that broker is redeemed. In many the commission is paid out in instalements after a number of years, and again switching nullifies these payments.

So what are the IBA doing here by saying you should be looking for 25% of your outstanding mortage as an incentive to switch? Well, in my opinion, they may be setting people's expectations way way too high so that they do not lose their commission.

A friend of mine came in to some money at the start of the year. She has a tracker of ECB +.65% on a mortgage of around 200K. She was going to pay off the mortgage (deposit held in different bank). I advised then to wait till the end of the year when I reckoned she'd get 10-15K off the principle. Advising someone they'd get 25% (50K) off that amount just isn't realistic and I'd question the motivation of anyone giving this advice.
 

Howitzer

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the article mentions 25% "to make it worth their while".

that advice stands as good!
Well here's how I make my calculation.

The average life of a mortage is 7 years. After that you switch / move / release equity to build an extension, all of which would be used to end the tracker.

Most of these loss making trackers were given out in 05-07. Suggesting an average of 3.5 years remaining.

If you move to a variable you'll, on average, pay 2% extra in interest.

2 x 3.5 = 7% of your outstanding principle (15K from 200K).

Banks will make a similar calculation to this when deciding what to offer you to break your tracker. It'll be the exact same formula they used when calculating breakage fees for those who wanted to go from a Fixed to Variable.

25% is not realistic and no underwiter / actuary would agree to it. I'm calling shenanigans on the IBA advice.
 

NorfBank

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Some of the mortgage brokers on the site may correct me but it's my understanding that if a mortage brokered by a member of the IBA is paid off early / switched, then the commission paid out to that broker is redeemed. In many the commission is paid out in instalements after a number of years, and again switching nullifies these payments.
There is usually a 3 year clawback.
In reality BOSI have not been lending for the past 2 years so most of their mortgage book will be 2+ years old.
If your mortgage is less than 3 years old, there is a high probability of negative equity so you may not be able to switch in any case.
All of these factors would make the effect of commission clawback on brokers negligible.

The 25% is a soundbite from the IBA and it looks like it has worked. They will be delighted to get this coverage.

www.moneybackmortgages.ie
 

jinx9000

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there is not one person reading this thread or even interested in this topic with 7 years left!

there home free in my book! let's keep this relevant to the people who bought in 2000-2008!
 

Howitzer

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there is not one person reading this thread or even interested in this topic with 7 years left!

there home free in my book! let's keep this relevant to the people who bought in 2000-2008!
You have mis-read my post. Statistically mortages only last 7 years before they get churned.
 

jinx9000

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You have mis-read my post. Statistically mortages only last 7 years before they get churned.
My apologies. I think we can safely say that in the future that figure will be revised up either due to an inabilty from the bank to let you break from the tracker ie no new mortgage approval for bigger house/ top up or your relucentence to allow youself to give up the tracker.

My guess is that the buyout option will only come after the ltv mortgage holders are hung out to dry by the banks on their rising ltv rates when the market bottoms next year.
 

galleryman

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QUestion.

I'm on an AIB ECB + .6% Tracker.
I wrote to the bank in May 2007 to instruct them to move me to that <50%LTV rate when my 1yr fixed rate finished a week or so later. I then received a simple letter from the bank a week later stating what my new repayment schedule would be and I have been on that tracker rate ever since. I did not receive any T&C document or official notification that I was on that tracker in the post. However they obviously received my written instruction to put me on that rate at the time and acted upon it and so I still have the tracker. I am extremely fortunate to still qualify for the <50% LTV status so that is not an option for the bank.
Is this lack of a T&C document a good or bad thing for me?
 

summersun

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if Mr Weston is writing about it, no smoke without fire, NIB were writing to tracker clients confirming their mortgage protection and fire insurance policies some time ago,

I would not rule out NIB stating there is now a material change as we have not received your confirmed policies: welcome to your new variable product
 

serotoninsid

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I would not rule out NIB stating there is now a material change as we have not received your confirmed policies: welcome to your new variable product
Yes - they were writing to mortgage holders re. insurance details. Just wondering if this was selective ie. just tracker customers??
 

bettyboo

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We received one of those letter re. Ins details from NIB and yes, we have a tracker mortgage with them.
 
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