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.