Punishing those on variable rates for losses on tracker mortgages is wrong

Punishing those on variable rates for losses on tracker mortgages is wrong

Those on variable rates shouldn't have to pay for the savings those on tracker mortgages are making

Homeowners with tracker mortgages would have had a small smile on their face yesterday afternoon when the European Central Bank announced plans to cut its interest rate to a record low of 0.15%.

The sixth rate reduction in the last two-and-a-half years, it is expected that somewhere between 375,000 and 400,000 people will benefit through cheaper repayments each month.

While the savings only equate to around €6 each month for every €100,000 borrowed, they are still to be welcome and now mean that those on tracker mortgages are saving thousands of euro per year from what they were paying in the autumn of 2011.

If we look back as far as the boom then the savings are even greater with ECB rates having fallen from 4.5% to 0.15% since 2008.

Worryingly for other homeowners though, it appears that those on standard variable rates are set to pay for the savings of others yet again.

Reports this morning suggest that banks here will increase their variable rates in the coming weeks and months to compensate for the losses they are making on tracker mortgages.

This is plain wrong and will only widen the gap in an already two-tier system. The average mortgage holder is now paying around 4% per year more on a variable rate than they would be if they had a tracker.

Following yesterday’s decision of the ECB, it means that a borrower with a mortgage balance of €200,000 over 20 years on a tracker rate of ECB + 1% will now have a monthly repayment of €932. By contrast a variable rate customer who owes the same amount also over 20 years, and who is typically paying 4.5% interest, will still have a monthly repayment of €1,255. This is a staggering €323 a month more than the person with the tracker mortgage. If the difference was maintained over the remaining lifetime of the mortgage it would amount to a massive €77,492 in additional interest and that’s before any potential increase.

It is to be expected that variable rates will always be higher in the current environment but to continue to increase them when the cost to the bank of servicing them is falling is wrong.

Yes, banks have to balance their books but it is unfair to punish others for what is essentially their mistake in handing out so many trackers.

The whole idea of the ECB rate cut is to stimulate the economy and get people spending. A large portion of the population will only be crippled by bigger bills if this morning’s reports turn out to be fact.

Surely the time has arrived for the ECB, the Central Bank or, indeed, the government to step in to ensure this doesn’t happen.

The lack of competition in the market at present means that people are already bereft of options. The news on mortgage arrears was positive this week, with a slight fall of those in serious arrears. It’s still a major problem though and while it may be slowly improving, an increase in rates may only push more and more over the edge.

Enough is enough surely.

There are 9 comments for this article
  1. christine fogarty at 6:40 pm

    People who got trackers should not have to compensate for bank losses . I’m glad for those that were lucky enough to get one. Neither should those on variable mortgages – the banks should take the hit – not the mortgage holders nor the Irish public. Stop fighting amongst ourselves and let the banks pay

  2. Kevin Wateford at 11:44 am

    Its a joke nothing is being done for people on variable rates ECB(1.15%) – (AIB)4.3% = 3.15%
    200000 Euro = 323.00Euro per month difference as a person commented why cant morgage holders on variable get A PIECE OF THE PIE i.e reduce variable rate to 2.15% or 2.5%, remember we paid twice to three times the actual value of the property in the first place plus our properties are in negative equity and still the banks & the goverment just TAKE THE PISS and TAKE TAKE TAKE when they have an oppourtunity ITS A COMPLETE JOKE NO FINANICAL EQUILTY IN THIS COUNTRY.

  3. maire at 10:29 pm

    I don’t think it’s fair to punish those on variable rates. Bear in mind that many of these bought at the height of the boom. They paid massive prices,thus helping the banks and the rest of us to enjoy the boom. Many are in negative equity and have paid thousands over and above in interest. Those on trackers should have to contribute a little to help everybody…can’t keep taking money from the same source. The Government has done nothing to help those who have boom time mortgages.

  4. angeladarragh at 6:52 pm

    Im a pensioner not rich living on 230.00€ a week
    and still paying a mortgage , Lets have a bit of clarity re loans ability to pay .
    Fairness , or is that a dirty word , in 21st Century Ireland ,
    Foresight ,if you take a persons home you will have to rehouse him or them where is the sens in that.
    Forgiveness , Lots of people went and did things we would not normally do during the boom and we are adult enough to know we must pay back what we owe and have every intention of doing so all we need is a little extra time to do it .
    So Bankers all we are asking is give us a chance.

  5. owen at 3:54 pm

    I agree with cheesedoffeconomist. He is right. Would love to explore the items further. How do I contact you.?

  6. KD at 2:18 pm

    Surely the cost of money is now so cheap to the banks that if they increased the amount of borrowing to customers then they could lower the variable rate and still be making enough off the new customers to offset the costs of older loans.

    Of course, a new entry in the market without legacy loans at higher cost could make a killing in this country at the moment.

    Government policy could change things and the taxpayers are owed a huge debt by the banks for bailing them out. What I don’t understand is how we’re paying the money back twice – once to the bondholders and again to the banks in the forms of our mortgages and so on.

    What will probably happen is nothing. The banks will continue to screw those that they can screw and won’t increase their loan books significantly utilising the cheap credit now available, the government will twirl its fingers and no new entrant will ursurp the market because only the crazy operate here.

  7. Cheesedoffeconomist at 1:51 pm

    Four things that can be done:
    1. Fix the bank costs once and for all: why is the bank loosing money when borrowing at 0.15% and lending at 1,5%? On a 300k mortgage I am paying them €3k/year margin, just to pass some money on!
    2. Make all variable mortgages Euribor based with a variable risk premium – i.e. some objective criteria deterins whether I should pay euribor+2% or Euribor +4%
    3. Shut down the Irish central bank, they are a completely inept and extremely expensive institution which is draining money out of the financial system and is incapable of regulating or understanding anything.
    4. Release all NAMA stock: there are more than enough buyers available and if we have enough new mortgages the banks can make a little money from a lot of customers rather than a lot of money from a few customers.

  8. Fiona Doyle at 1:33 pm

    Everyone is feeling the pinch so give everyone a piece of the pie when things are good and stop the trend of making the rich richer.

  9. Boris at 11:28 am

    What do you suggest the government should do though? Allow the banks to break their contracts with tracker mortgage holders? Use taxpayers money to finance the banks (mostly public owned) and let them lower variable rates?

    While on principle most people would probably agree that it doesn’t make sense to penalise new borrowers, I can’t really think of an option to alleviate this which would be accepted by the public … Do you have one in mind?

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