Leave aside the complication of cheap trackers for the moment. Assume that a borrower has 5% standard variable rate loan.
House value|€200k
Mortgage|€300k
interest charged on mortgage|€15k
interest applicable to the house value |€10k
Borrower can afford repayments of| €12k
which represents the interest on a mortgage of|€240k
It is argued that the bank would be better off reducing the mortgage to €240k either by writing off €60k or warehousing it interest-free.
If they repossess the house, they will sell it for €200k and only get the interest on €200k, whereas at the moment, they are getting the interest on €240k.
While debt forgiveness is better for the borrower, there is no need for it in this case. The Deferred Interest Scheme can cope with this very well.
€3k of interest is deferred each year, until the borrower is in position to repay it.
Let's say we go for the Debt Forgiveness solution.
The bank writes down the mortgage to €200k - potential cost to taxpayer :€100k
The borrower pays the interest and some capital off their mortgage.
Over time, the house will probably increase in value.
The mortgage outstanding will be reduced as the borrower is paying off the capital.
The end result is that the taxpayer will have paid €100k on behalf of the borrower, so tha t they can buy their own home.