Will the banks continue to lose money on tracker mortgages...

P

Paulk

Registered User
Messages
112
Considering that the ECB rate is rising next month, it is inevitable that there will several further increases over the next 2- 3 years.

I realise that the banks are currently losing a significant amount of money on tracker mortgages. However, this is only temporary; say for example if the ECB rate is at 5% in 3 years time, then the banks will no longer be losing money on tracker mortgages. If this is the case, why are the banks so desperate to rid themselves of tracker mortgages?

It's really just a case of weathering the storm.
 
Paulk said:
However, this is only temporary; say for example if the ECB rate is at 5% in 3 years time, then the banks will no longer be losing money on tracker mortgages.
Click to expand...
Why would they be losing any less with ECB @ 5% than ECB @1%? Trackers are priced at a fixed percentage above the ECB rate - irrespective of that rate.
 
Howitzer said:
Why would they be losing any less with ECB @ 5% than ECB @1%? Trackers are priced at a fixed percentage above the ECB rate - irrespective of that rate.
Click to expand...

If ECB gets to 5%, they might be able to borrow in the inter bank markets at a lower rate plus the margin. Impossible to do so now.
 
Howitzer said:
Why would they be losing any less with ECB @ 5% than ECB @1%? Trackers are priced at a fixed percentage above the ECB rate - irrespective of that rate.
Click to expand...

Because someone currently on a tracker mortgage of ECB plus 1% is paying just 2% interest each month to the bank.

If the ECB rate is 5% in 3 years time, then this person would be paying back interest of 6% to the bank. Clearly, the banks will be in a much better position financially as their customers on tracker mortgages will be paying back a lot more money than they currently are.
 
Paulk said:
Because someone currently on a tracker mortgage of ECB plus 1% is paying just 2% interest each month to the bank.

If the ECB rate is 5% in 3 years time, then this person would be paying back interest of 6% to the bank. Clearly, the banks will be in a much better position financially as their customers on tracker mortgages will be paying back a lot more money than they currently are.
Click to expand...
That makes no sense. It's the difference between their funding costs and the interest paid back which matters. If the ECB rate is @ 5% the cost of money to the won't be less than that.

I'd go with the proposition that deposit holders will get squeezed but am not sure how much a dent this will make. I don't buy the notion that interbank lending will be less than the ECB rate, or that banks reliant on interbank lending won't be still making a loss.
 
Inter-bank rates are never lower than ECB because they contain a credit spread. If the ECB rate is 5%, banks are still borrowing at 5% + margin. The problem is that this margin at the moment is a few percentage points for Irish banks. The market will eventually normalise but it will be a long long time before an Irish bank will be able to fund themselves at ECB+75bps as some trackers are priced.
 
Howitzer said:
That makes no sense. It's the difference between their funding costs and the interest paid back which matters. If the ECB rate is @ 5% the cost of money to the won't be less than that.

I'd go with the proposition that deposit holders will get squeezed but am not sure how much a dent this will make. I don't buy the notion that interbank lending will be less than the ECB rate, or that banks reliant on interbank lending won't be still making a loss.
Click to expand...

But going back to 2006/07, the banks were happy to sell tracker mortgage as they were obviously making a profit on them ie when the ECB rate was 4-5%.

Therefore, how will they not return to profits when the rate returns to 5%?

When the ECB rate returns to 5%, why will it be more expensive for banks to source funding for tracker mortgages than it was a few years ago (when the rate was 5%)?
 
PeterDublin said:
But going back to 2006/07, the banks were happy to sell tracker mortgage as they were obviously making a profit on them ie when the ECB rate was 4-5%.

Therefore, how will they not return to profits when the rate returns to 5%?

When the ECB rate returns to 5%, why will it be more expensive for banks to source funding for tracker mortgages than it was a few years ago (when the rate was 5%)?
Click to expand...

It's not the absolute ECB rate that matters with regard to the bank's profit (does make some difference but lets keep it simple). It's the margin that they offer the tracker at and the margin that they pay for their funding. In the old days, the margin they paid on funding was a couple of basis points. Now it is a couple of hundred basis points
 
PeterDublin said:
When the ECB rate returns to 5%, why will it be more expensive for banks to source funding for tracker mortgages than it was a few years ago (when the rate was 5%)?
Click to expand...

Because nobody attached any great degree of risk to funding banks a few years ago. Now we have a situation where the markets see banks as risky and charge them a higher margin over ECB to provide funding to them. It may be a long time before the banks regain the type of trust that existed a few years ago.

On the other hand, the banks are selling off loans and improving their deposits to loans ratio. If this ratio improves, and when interest rates are higher, it may be possible for banks to get in deposits at less than ECB, thus making a margin on loan interest over deposit interest.

So I certainly wouldn't predict that banks will lose money for the entire term of their trackers.

In response to the Paulk's original point, I don't think the banks are overly desperate to get rid of trackers. I haven't seen any bank offering 10% or 20% discounts to tracker repayments, that would start to smell more like desparation.
 
Ive approached my mortgage provider to tell them I may encounter some financial change shortly and am considering stopping considerably overpaying my mortgage or going interest only for a period.

I have asked them to give me an incentive to continue overpaying or give me an incentive to make a considerable lump sum payment, both options benefiting both me and the bank or risk me going interest only for a period, costing them more money in the long run.

I think. I have a decent tracker, ECB + 1% so we'll see if their willing to do business or not.
 
Would be very interested to hear how you get on (as I'm sure other would be) - please keep us informed!
 
munsterman25 said:
Ive approached my mortgage provider to tell them I may encounter some financial change shortly and am considering stopping considerably overpaying my mortgage or going interest only for a period. I have asked them to give me an incentive to continue overpaying or give me an incentive to make a considerable lump sum payment, both options benefiting both me and the bank or risk me going interest only for a period, costing them more money in the long run...I think. I have a decent tracker, ECB + 1% so we'll see if their willing to do business or not.
Click to expand...

This seems contradictory to me.

If you are in position to pay a lump sum off your mortgage, there is no reason for the lender to change the terms of your mortgage to interest only, unless you have an interest only mortgage on which you are voluntarily overpaying.

But the problem for this is that it makes the banks wary of dealing with genuine cases who need to go interest only. It makes the banks suspicious that they have money elsewhere with which they can afford the full
repayments.

By all means, ask the bank if they will give you a discount for paying off a lump-sum, but don't threaten to go to interest-only if they don't give you such a discount.

Brendan
 
Brendan Burgess said:
This seems contradictory to me.

If you are in position to pay a lump sum off your mortgage, there is no reason for the lender to change the terms of your mortgage to interest only, unless you have an interest only mortgage on which you are voluntarily overpaying.

But the problem for this is that it makes the banks wary of dealing with genuine cases who need to go interest only. It makes the banks suspicious that they have money elsewhere with which they can afford the full
repayments.

By all means, ask the bank if they will give you a discount for paying off a lump-sum, but don't threaten to go to interest-only if they don't give you such a discount.

Brendan
Click to expand...

This cash will be used to pay off a lump sum off my mortgage or go toward another debt.
My decision/neccesity to go interest only will have nothing to do with this lump sum which will either go against my mortgage with an incentive or go to settle another debt.
 
This was the general jist of the response from my mortgage provider when I requested an incentive to continue overpaying or make a lump sum payment.

This is a huge benefit to a customer to do but not to the bank, as the bank would receive more Interest if customer just paid the standard repayment and never make large out of course lodgements as the current balance would decease at a slower rate and the interest is calculated based on the outstanding balance to date. The smaller the current balance the smaller the amount of interest charged
 
They're a pack of BS merchants so.

At best they seem to forget that they probabky have borrowed the money to lend to you at an even higher rate than you are paying (on deposits and on the interbank markets).

At worst they are very cynically doing nothing to improve their loans to deposits ratio, instead milking the cheaper emergency finance from the ECB for all it's worth instead of trying to sort themselves out.
 
I think you're overestimating the knowledge of the average banking customer services department.

I would hazard a guess that they neither know nor care about the funding costs of mortgages.

The answer given would make sense in normal times. These are not normal times.
 
NorfBank said:
I think you're overestimating the knowledge of the average banking customer services department.

I would hazard a guess that they neither know nor care about the funding costs of mortgages.

The answer given would make sense in normal times. These are not normal times.
Click to expand...

Customer services would have been given a position on this.

What we're seeing is the moral hazard of banks not being incentivised to independently get themselves out of the mess as long as the ECB prop them up with money that ultimately will come out of our pockets.

The bland response is complete BS and I've no doubt management have actively decided to take this position.
 
You must log in or register to reply here.
Back
Top