Lack of Zero Floor on Tracker Mortgages About to be Tested

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There is speculation that the ECB might cut the refinance rate from 0.00% to -0.10% on 25 July or later this year.

This should mean that a 70 bps tracker drops to 0.60% unless there was a zero floor clause in the tracker contract.

Davy have told the Sunday Times:
"Our understanding from engagement with the domestic banks is that loan documentation does not include any zero floor on the reference rate itself,” but if rates were to drop further "all the main banks told Davy it was unlikely that they could end up having to pay interest on tracker mortgages if rates fell far enough" but they could not offer "absolute assurance" on this.

So will banks drop tracker rates if the refinance rate goes negative? Seems that yes they will but only up to the point that the mortgage rate itself hits zero.
 

elacsaplau

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I doubt anyone thought back in 2004 that negative rates were in the possible universe of outcomes.
I understand where you are coming from but...…....the academic debate on negative interest rates goes back well over a hundred years - with Silvio Gesell being generally recognised as its first proponent.

I'd argue that the possibility of negative interest rates was foreseeable back in 2004! Very simply, Euro interest rates were then at 2% and Japan was already at 0% and there was debate at that time whether Japan could go negative!

If you think about it, the then long-term trajectory of interest rates in developed economies had been one of interest rate reductions. Consider, for example, what rates would have been in 1994 and 1984 - so surely a reasonable question to have asked then (i.e. in 2004) is whether this trend could continue and how far it could go?!

In general, I am struck by how often people confuse improbable with impossible! I agree with you that this would not have been on the radar of most customers / mortgage brokers / commentators at that time but weird stuff happens all the time!!
 
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Codogly

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Wouldn't it be crazy if we ended up in a situation where a bank were paying interest to a customer on a Loan owed to that bank...and the customer was declaring interest income from their mortgage on their tax return.
 

Protocol

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If the ECB do cut rates, then may cut the deposit rate, not the main refi rate.

That would mean no effects on Irish tracker mortgages.
 

Protocol

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Even if they do cut the main re-financing rate below 0%, it would require a cut of 0.50% to leave some (not many) Irish mortgages at 0%.

The lowest margin tracker were NIB 50% LTV trackers at ECB + 0.50%,
 

Codogly

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Hi Protocol,
It would appear that the ECB are in fact considering a cut to the re-financing rate ( media reports ) ... not sure why but that’s what’s been reported.
Even a -.10 cut will eat into low bank margins...and it means the unthinkable is moving towards possible.
Ciarán T ... why would Danske be looking for a larger cut to the Re-financing rate ???
 
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I suspect that 20 bps is what Danske think the ECB need to do to help meet ECB inflation targets.
 

Codogly

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At what stage would the mortgage lender consider offering discounts on the loan outstanding ...like you said the original NIB Trackers were 50bp + ECB ...hard to say I know it depends on the future expectation of rates but I’d love to see even for a few months were the banks were paying interest to some customers
 

derwalsh

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If this goes ahead do people think there is a possibility of banks offering deals to customer to pay off part or all their mortgage?
 

Bizzybee

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If this goes ahead, would Pepper Group who have taken over Danske Bank Mortgages be obliged to pass on the rate cut? They are still not producing statements despite requests so it is a guessing game as to whether or not they are applying the correct interest rate as it is.
 

peemac

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If this goes ahead, would Pepper Group who have taken over Danske Bank Mortgages be obliged to pass on the rate cut? They are still not producing statements despite requests so it is a guessing game as to whether or not they are applying the correct interest rate as it is.
If its a tracker, then there is simply no option for them but to apply the rate depicted in the contract. And if you don't have your mortgage contract, you could ask your solicitor who handled the purchase for a copy.
 

Baby boomer

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Looking forward to this! Tracker of ecb+1% on investment property with PTSB. They wrote to me a few years ago offering a ten per cent (if i remember correctly) "bonus" on any lump sum repayment. Funds were tight so I didn't avail of it. Wonder if they'll up their offer??
 

AnyAdvice

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I'm trying to calculate how much BOI are losing on my tracker mortgage (ECB + 1.1%). Received the 35 year loan in March 2008. Euro 271k loan. Euro 200k outstanding. Current house value approx Euro 225k. I've leased it for 10 years.

If I was able to calculate that the bank stands to lose ~$40k (example) over the next 10 years assuming ECB rates stay below 1%, I'd propose for a ~$25k discount if I repay in a lump sum.

Thoughts on how to model this calculation.
 

Codogly

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I guess the question here is , “ at what point would any bank start thinking about offering discounts haircuts to off load performing yet loss making trackers “ ? ... so if we use the example of the lowest know trackers around ( old NIB / Danske trackers - ECB + 0.50 ) that st what stage would the ECB Refinance rate need to get to ?... -.10 , -.20 , -.30 ???pr indeed all the way -.60 etc
 

NoRegretsCoyote

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I'm trying to calculate how much BOI are losing on my tracker mortgage (ECB + 1.1%). Received the 35 year loan in March 2008. Euro 271k loan. Euro 200k outstanding. Current house value approx Euro 225k. I've leased it for 10 years.

If I was able to calculate that the bank stands to lose ~$40k (example) over the next 10 years assuming ECB rates stay below 1%, I'd propose for a ~$25k discount if I repay in a lump sum.

Thoughts on how to model this calculation.
As you can see by looking here, Bank of Ireland is raising deposits at a rate below what you pay on your tracker.
 
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