Trackers: Early Repayment v's Normal Annual Reduction

[marathonic]

A lot of people are talking these days about early repayment of trackers and potential discounts offered by banks.

Obviously, all banks are keeping a close eye on this.

With the interest rates on trackers so low, the majority of monthly payments made by the holders of these mortgages pay down the capital as opposed to interest.

In the case of NIB, they have a lot of trackers at 0.5% above base rate, or 1.25%.

If the average tracker term remaining is 20 years, this would imply that the capital outstanding on trackers is reducing by almost 4.5% per year.

Add to this the people upsizing, downsizing and relocating due to children, retirement and job opportunities elsewhere in Ireland and abroad, and you'll get a higher figure.

Add to this the people who pass away and, in general, these would tend to be the people who have the higher valued homes (older and built up enough equity in previous homes to enable them to secure the 60% LTV required in the first place). When their estates are settled, so are the trackers.

I have no idea what percentage of the tracker value outstanding would be paid back through these categories but wouldn't be surprized if it significantly exceeded the balance being reduced through normal repayments.

The banks, obviously, have access to these figures and may have a plan in place to venture into the offering of discounts for early payment when it makes economic sense for them.

If it made as much sense for them as a lot of people are implying today, they'd have already all came out with such offers. Would you agree?

 

[marathonic]

As an example, I have an NIB tracker over 30 years (25 remaining) and my brother has one over 10 years (5 remaining).

Looking at these two in isolation, as a bank, I would be more inclined to say "we'll wait 5 years and then put an offer to the market for discounts for early repayment"

 

[Brendan Burgess]

Hi marathonic

You make a good point. The ordinary repayments would account for around 4%. And maybe the others do account for 4% as well. You left out all the people who are overpaying their trackers and who pay off lump-sums to reduce their borrowings. It could well be dropping by 8% a year.

As people with trackers are less likely to be in arrears, the banks probably are happy enough with them.

The ecb will also provide funding to the Irish banks at the ecb rate of 0.75%. This is probably linked to the fact that the banks have such big tracker books. On top of that, the deposit market has normalised a bit, with all the banks lowering their deposit rates. This means that they are losing less on their tracker books and it also means that those with trackers are finding it hard to make an after-tax return on their deposit in excess of the mortgage rate.

ptsb is the only bank to give a discount so far. Apparently they did as a grab for cash. It was very badly thought through in that they gave anyone who applied 10%. This meant that those who had shorter outstanding terms and those who thought that they might be moving in the near to medium-term future took advantage of it. Those who had no intention of moving, ignored it. So there was self-selection against it.

Bank of Scotland has given full-term interest only mortgages. So they are not getting the 4% a year which you mention. They also want out of the Irish market. So they might introduce a system.

I understand that the main banks tried to get the government to take the trackers at face value from them. That made no sense at all and the idea has been dropped.

If the next stress testing of the banks force the banks to make big provisions against their trackers, then the banks might be incentivised to offer some deal.

 

[marathonic]

Yeah, I agree that the 10% across the board offer wasn't a good plan at all from the banks perspective.

The second other banks offer any sort of discounts, the media will be all over it and people will be well informed of whether it makes sense for them to accept or not - it's not the 1960's any more and people are a lot more informed

Therefore, the bank really need to try to identify the people that are most likely to sit out the term of the mortgage if no discount is offered. I'm not sure how they'd go about this - perhaps the people who have the longest term and are in negative equity to the extent that the discount would just about bring them out of negative equity.

Say, for example, someone took a mortgage of €100,000 on a house valued at €200,000 at the height of the boom. In my area, that house would now be worth around €80,000. Their mortgage balance would now be in the region of €88,000 if they took it out over 30 years (and it was taken 5 years ago).

Obviously, if a person in this scenario were to get an agreement from the bank to sell, they'd owe a shortfall of €8,000. If they were offered a 10% discount, they could sell up with no shortfall and enter rented accommodation or emigrate if they wished.

I wonder how hard it would be for the bank to identify people that fall into the above category? I'd imagine it'd be very easy considering they should still have the original valuations as well as mortgage outstanding information stored in their databases.

 

[Brendan Burgess]

Hi marathonic

They don't have to identify them in advance.

They can invite people to offer to pay off their mortgage and they can offer a discount to them based on the interest rate, the remaining term, and whether or not it is interest-only for the full term.

Brendan

 

[marathonic]

Yeah, I have an understanding of what you are getting at - as in, I'd get a bigger discount than my brother on our mortgages because mine has a significantly longer term.

But what I'm trying to say is would it not be better, from the banks point of view, if the discounts were based on the likelihood of someone holding their current mortgage for the entire term.

For example, why offer someone who is overpaying the same discount as someone who isn't? You wouldn't expect to lose as much on the mortgage that is being overpaid.

Likewise, if a person isn't in negative equity at the moment, they can move at will. If that person happens to be in their twenties and living in an apartment, you could safely assume that a large number of these will move in the next few years as they marry off and have children. Therefore, why offer them a discount?

Your post looks at the figures, which are the main factor. However, there are other things that banks would probably take into consideration if they look at the potential long-term savings to them.

Now, if a person is living in a one-bedroom apartment and in negative equity to the tune of 10%, then they will be stuck there until the mortgage is paid down by that amount or house prices move upwards by that amount. By offering that person a 10% discount, they may accept, sell the house and be back at square one saving for a deposit.

In doing so, there'd be light at the end of the tunnel in their quest towards owning a larger home for their growing family and the bank would have offered the same discount as PTSB did but have got a loan off their books that was in negative equity and likely to remain on their books for the longer term through necessity as opposed to desire on the part of the mortgage holder.

Basically, in this scenario, it looks to me like the bank would have got the max potential return on their 10% write-down and would be coming out looking more like the heroes due to the circumstances the person accepting the offer found themselves in.