You would be crazy to give up your trackers. That was the headline of an op-ed by this journalist in this newspaper in April 2010.
This advice has served the people well.
But is it still good advice, or is it time for some tracker mortgage holders to think the unthinkable and ditch their trackers?
Perhaps the situation has changed so much that some tracker holders might be better off opting for a fixed rate. Heresy I hear you say.
The original advice from the comment from 12 years ago has served tracker mortgage holders well.
It was written shortly after the Bank of Scotland and its retail offshoot, Halifax, decided to exit the market. This bank had launched tracker mortgages.
The tracker trick seemed like a treat. The Scottish bank snapped up plenty of deals as savvy Irish consumers realized trackers were of great value.
With trackers, banks can only increase the interest rate if the European Central Bank (ECB) raises its refinancing rate.
And the interest rate you pay for a tracker is a set percentage above the ECB rate.
This is called the margin and it varies quite a bit. Some people have margins as low as 0.5 percent. Since the ECB refinancing rate is 0 percent, this means that the interest on the mortgages is only 0.5 percent.
Typically the margin is around 1 piece, others have much higher margins.
Trackers became a financial disaster for banks. So the banks turned out to be crackers because they gave us trackers.
This is because a situation developed that the banks had not anticipated – the cost of wholesale money (which they used to fund mortgages) deviated from the ECB interest rate during the financial crash. Additionally, trackers have been mispriced by banks in other ways. Lenders had subsidized unsustainably low tracker interest rates to build market share.
This situation led to the underhanded and immoral actions of the banks to distract people from tracker rates – something first exposed by this journalist in this newspaper in 2009.
Years later, when the central bank finally acknowledged what had happened, it forced banks to return the trackers of more than 40,000 homeowners, refund them overpaid interest, and pay compensation. The Tracker mortgage scandal cost the banks here 1.5 billion euros.
No wonder the banks wanted to talk us out of the trackers. The last few years have been good, really good for those with trackers.
The governors of the ECB have kept their refinancing rate at 0 percent for the past six years. This means tracker mortgage holders have committed financial murder.
There is a joke that asks how do you know if someone has a tracker. They will tell you is the answer, they are so happy with themselves.
All of this means we have a long and painful history when it comes to the tracker mortgage – something that’s as much part of Irish lore today as Tayto chips.
But is it time to end our relationship with our beloved trackers? That time might have come for some tracker mortgage holders, although it seems illogical.
Despite banks’ best efforts in the past to trick people out of their trackers, some tracker owners might be wise to consider dropping them voluntarily.
Why? Because interest rates are expected to rise and will rise rapidly over the next few months.
From 0 pieces they could be 1 piece or 1.5 pieces by the end of the year. Some economists expect the ECB’s interest rate to stand at 2.5 percent by the end of next year.
This will make some trackers expensive and reverse the situation we’ve had for the last few years.
But be warned: this advice only applies to those with expensive trackers.
In other words, ONLY if your tracker is set to margin more than 1.5 percent over the ECB interest rate should you even consider giving up your tracker.
That’s the whole point. Stick with the tracker if your margin is 0.5 percent or 1 percent or 1.25 percent. It will be good value for a good while.
High-margin trackers are getting expensive. If the ECB interest rate hit 2 percent, someone on the tracker with a 1.5 percent margin would be paying 3.5 percent interest.
The reason it might be a good idea to ditch the tracker is that fixed rates are cheap in this market now, cheaper than ever. This is despite two-tier rate hike announcements from ICS Mortgages and a planned rate hike from Avant Money.
But for those with low loan-to-value (LTV), fixed rates of just 1.95 percent are still on offer. Even if you have an LTV of up to 90 percent, you can still get a 10-year fixed rate of 2.7 percent.
A key factor is the LTV ratio you have and how many years you have left to pay. Many phased out trackers more than a decade ago, so their LTVs are low.
But if they only have five to 10 years left, sticking with the tracker makes sense.
Also keep in mind that swapping a tracker for a fixed rate may reduce flexibility to overpay your mortgage.
The key lies in good professional advice. Get a good real estate agent to check the situation. As they are highly regulated, they will not advise you to do anything that is not in your best interest.
And also remember that if you give up your tracker, you probably won’t get it back.
https://www.independent.ie/business/personal-finance/property-mortgages/why-it-may-not-be-crackers-any-more-for-some-of-us-to-give-up-our-trackers-41672914.html Why giving up our trackers might not be a hit anymore for some of us