I bought a house in 2006 at the height of the frenzy for 320,000 euros in Dublin. During the real estate meltdown, I was (needless to say) very quickly in severe negative capital, with a similar property sold in the property for only €56,000! At its height, I was paying up to €1,430 per month for mortgage payments for the first two years due to high ECB rates. The monthly mortgage is currently around €986 per month.
As a landlord – occupant, I am currently making use of a room planner rent and a two room rental, generating approximately €12,000 per year which I contribute towards the mortgage and house maintenance.
When checking my mortgage balance this week, I now owe around €187,000 and have been informed that I have a tracked mortgage. The banking advisor was reluctant to give me more details regarding the interest rates I am currently paying over the phone.
Looking at the current loan-to-value ratio, do you have any advice as to whether there are better mortgage options available to me at the moment considering that interest rates have been low for several years and will reportedly rise in the near future.
Over the past 15 years, tracked mortgage holders have been a protected species – a rare winner in the Irish bank crash and its aftermath.
With interest rates set at a margin above European Central Bank rates, tracked mortgages have ensured those who own them enjoy some of the cheapest home loan rates in Irish bank history – especially since ECB rates have fallen below 1 per cent over the past decade.
Banks had already pulled the product out of the market because they discovered that they could never reliably make money from it in the volatile money markets. And, as we later found out, they’ve spent a great deal of energy illegally trying to overturn one of the few times the Irish consumer has taken the lead in the Irish banking market.
Although they haven’t been for sale in over a decade, tracked mortgages still account for about 30 per cent of the Irish mortgage market – with over €25 billion outstanding – so there are many people in your position.
There are a few things to be said here but first of all, what is your lender playing with?
They are happy to tell you how much you owe, but not what interest rate do they charge? This, in and of itself, raises all sorts of red flags.
Banks are very careful in their dealings with customers, especially remotely. In the same way that consumers are advised to never fall for a scam by responding to texts, emails or phone calls purportedly from their bank, banks will never assume that anyone calling them as a customer is actually who they say they are.
That’s why, correctly, they look for different bits of information from callers to satisfy themselves as they say.
In this case, they are clearly satisfied with the topic because they provided you with details of the outstanding mortgage balance – very sensitive and personal information – and reminded you that you are tracking the rate tracker. However, they then refused to reveal much less sensitive information – what a tracked mortgage rate is.
For you, this is naturally important information as you try to evaluate your options in a high interest rate environment. The lender wants you to actually schedule a time to come see them before they release this information.
After our initial conversation, and based on my advice, I told them to take control, and after holding their line on the phone call, I know they later emailed you with your tracking margin, which is 1.25 percentage points. Why such drama was needed, other than the suspicion that they wanted to try to sway you in any switch option, is a mystery. They may be afraid that they might not be competitive if you start looking around at the options.
Anyone who has contacted a bank recently knows that getting appointments for in-person meetings is next to impossible given the pressure of people looking to move the bank from departing Ulster Bank and KBC, so the reason this seems like a good idea to them is beyond me as well.
Anyway, here you are on a 1.75 per cent mortgage rate – a 1.25 percentage point tracking margin on top of the current ECB rate of 0.5 per cent after the July increase. Prices are sure to go up again this month and at least for the next year.
How high will they rise? Now this is the magic question and the only honest answer is that no one knows.
The European Central Bank had been hoping to move in quarter point increments but recent inflation and other economic data means that a half point increase is the minimum now expected this Thursday, with many people indicating they could jump by three quarters of a point. If that happens, the mortgage rate, which would have been as high as 1.25 percent as recently as June, will suddenly rise to 2.5 percent. In other words, the rate would have doubled in just three months.
European Central Bank rates have been as low as 0 per cent and as high as 4.75 per cent over the past 23 years. The market was expecting ECB rates to stabilize somewhere around 2 per cent (which means a 3.25 per cent mortgage interest rate for you) but with core inflation — inflation removing the impact of higher prices on energy, food, alcohol and tobacco — now is ahead. Comfortably on the ECB’s 2 per cent target and it doesn’t seem to moderate so far, doubts should be that it could rise at least for a short time.
This then raises the question of how long they might stay high, and again, this is kind of a “wait and see” issue. Essentially, until the ECB is happy with its grip on inflation, it will not cut interest rates.
So what does this mean to you?
You won’t switch by Thursday and the expectation is that interest rates will rise across the board with Irish lenders following the outcome of the ECB meeting. If it’s any consolation, you wouldn’t have had the time even if you moved in late last week when you first made contact. Any shift to a new rate will require an appraisal of your property and some legal paperwork.
But you still have to study your options, and it is better to take advice from a professional broker (I am not one). As you might guess, on a mortgage that’s less than 60 percent of your home’s value — assuming it’s revalued for 2006 — you’ll be in line for better rates.
If you qualify for a “green” mortgage—that is, your home has a BER rating of B3 or higher—you can currently get a rate as low as 2 percent, fixed for four years with Haven, which is part of AIB Bank, as is this EBS the days. AIB offers itself 2.15 per cent over five years and on broadly the same terms.
Leaving the “green” to one side, the permanent TSB will offer 2.05 percent for four years while Avant has a 2.25 percent rate, also over four years.
All of these, of course, are before your current interest rate. What you do with any move is look to “beat the market” by holding a rate that will be lower on average over the period that you keep than your current tracking rate will be during the same period that the ECB is raising interest rates. On a loan of your size, each quarter-point increase by the European Central Bank should add about €25 to your monthly payment.
Of course, if you have a decent number of years left on your mortgage, you’ll also need to assess what interest rates might look like when the current hype wears off, and how that compares to the rate you’d enjoy if you stayed. with the tracker.
There are also variable rates of course, but they are less valuable at the moment and will also rise from those current levels as the ECB rates rise.
The only thing to remember is that if you get away from your tracker, you won’t be able to get back in. So you have to think carefully about whether it is a good idea to abandon the current arrangement.
It is of course tempting to say that you should have done it again in the first half of the year when very attractive rates were available even at fixed rates for 10 years or more but no gain from looking back and “could have” – and at any In case you’re not sure it would have been the right move for you.
Irish fixed or floating rates were not within 1.25 percentage points of the prevailing European Central Bank rate. Prior to July, the best flat rate available in Ireland was 1.95 per cent with Avant for those with a loan of less than 60 per cent – still 0.7 percentage points more than you were paying – and Irish average interest rates were 2.69 per cent. , more than double what you paid.
The stabilization now may or may not pay off however long the reform takes, depending on how quickly and how quickly the ECB raises rates, but in the long run, the 1.25 percentage point margin still looks attractive — even with the lender playing silly buggers with his clients.
Please send your inquiries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to firstname.lastname@example.org. This column is a service to the reader and is not intended to replace professional advice