Will trackers always cost the bank more to fund than the interest earned?

[advice pls]

I often see the fact that trackers cost the banks money as a reason people feel a lump sum payment should result in a discount.

I was just wondering will this always be the case or say in ten or fifteen years time there be a point where rates are higher and things more stable and trackers will no longer be loss making? If so is it not in the best interest of the banks to refuse such offers from customers and since they are funded by the taxpayer in all our interests?

Apologies if this is a stupid question I've just never really understood how it works long term.

 

[so-crates]

No it does not mean that banks will or even always have made a loss on tracker mortgages.

A tracker mortgage is linked to another interest rate. In Ireland trackers track (i.e. change with) the ECB interest rate. They were offered by banks as at the time it was a reasonable assumption that the cost for the bank borrowing the money to fund the mortgage would be continue to be close to the ECB rate. The money they make is the difference between the interest rate they pay and the interest rate you pay. The money they borrowed was on a much shorter term so they have to keep reborrowing to finance your mortgage. Unfortunately for the banks, this hasn't remained true and banks have found themselves paying more to borrow money and not able to up the rate of interest they charge you.

So you borrowed 100k @ ECB rate + .95 in 2006, the bank borrowed that money for a month from a bank in Germany for ECB rate + .1. Happy days for bank, bank refinances as it needs to always looking for the lowest interest rate it can get. jump forward a few years. Credit crunch happens, bank is trying to refinance your mortgage, but now it finds that the lowest rate it can obtain is ECB rate + 2.5. Bank is stuck, it has to refinance but it can't recoup the full cost of that from you because of the tracker. Bank loses.

 

[Knuttell]

I
I was just wondering will this always be the case or say in ten or fifteen years time there be a point where rates are higher and things more stable and trackers will no longer be loss making?

Natural attrition ie people moving house,death,repossession etc will take the sting out of the tail of trackers for Banks also 15 years from now will have seen a lot of these trackers rinsed out as a lot of mortgages (not all) were 20-25 year terms.

Inter bank lending will not always be as expensive for our leper colony banks to borrow at.

I am not a mortgage broker type guy nor work for a pillock ("pillar" laughable I know) bank so just a layman's guess.

 

[Brendan Burgess]

At present the ECB rate is 0.5%.
Tracker mortgages are typically 1.5% (ECB +1%)
But deposits are costing around 2% (ECB + 1.5%)


In a normal market,the ECB rate should be much higher, and the cost of deposits should be less than the ECB rate, I think. (That is the way it used to be anyway)

If normal conditions resume, the banks will probably be paying ECB - 1% on deposits, so they will have a marging.

Not sure how long that will take though.

Natural attrition ie people moving house,death,repossession etc will take the sting out of the tail of trackers for Banks

The biggest reduction in the amount of trackers outstanding will be the normal monthly repayment of mortgages. People with savings make capital repayments anyway, even if they are not moving house. Death and repossession would account for a tiny percentage.