A MAN I know who is well versed in financial matters, being a very senior and successful figure in Irish business, received a phone call recently from his bank, inquiring as to his financial well-being.
The man was somewhat surprised as he has a secure income and has not missed any repayments on his loans, either on his home or on a couple of investment properties that he bought during the boom years. His bank manager seemed reasonably reassured but then made a suggestion: would he like to accept a lump sum as an inducement to give up his tracker mortgages? The businessman said no. He reckons that if you have a 20-year €300,000 mortgage the benefit of being on a tracker mortgage — one that guarantees the lender will charge only an agreed premium over the prevailing European Central Bank base rate — could be worth €100,000 in lesser interest rate payments over the life of the mortgage than would be available on a standard and more expensive variable rate mortgage. He was being offered €15,000 to switch, which is quite clearly a bum deal, for the borrower at any rate if not for the bank.
This man was astute enough to realise this but you have to wonder how many less experienced borrowers would succumb to pressure from the banks to make such a switch on their mortgage. At face value such an offer might actually be attractive to many people who are short of cash at present, particularly if they weren’t aware of the net long-term cost of the deal on offer. The money now might allow them to clear their credit card bills, for example, or give them the money for a new car if a separate loan was not forthcoming from the bank. It might even provide the cash that would allow the borrower to continue the monthly mortgage repayments over the next couple of years, particularly if the loan was on an investment property that is not producing the expected rent.
Such money could be used as a way of making a lump-sum payment against the principle, seemingly bringing down the amount that is owed by that same amount and seemingly giving borrower less of a future burden to worry about: however, if the borrower is now paying 2% extra in interest on the remaining balance it is very likely that he will end up paying substantially more back to the bank over the remaining life of the smaller loan than if he had stuck with the original deal.
A smooth-talking bank representative could persuade borrowers to do things that are not in their best interests — after all, how many times has that happened before? Now the banks are not supposed to do this type of thing. The Central Bank had made it clear to them, going back 18 months, that lenders are not supposed to renege on the contracts they signed with tracker mortgage customers. It hasn’t stopped some of them from trying though.
The banks are desperate. Tracker mortgages are costing them an absolute fortune. They are the zombie-like legacy of the boom. To win business pre-2008 the banks offered long-term loans — sometimes of up to 35 years — at a guaranteed rate not much higher than the ECB rate. However, they borrowed the money themselves to make the loan on the short-term money markets. Those rates have soared now above the ECB rate, creating an automatic and ongoing loss for the banks whenever they replace existing short-term loans with new ones. The lenders have been increasing the prices on their existing and new variable rate mortgages and on any new fixed rate ones, in an effort to curtail their losses, but they are stuck when it comes to trackers. These trackers are small mercy to borrowers, especially those who are stuck in negative equity, having an outstanding loan that is far bigger than the value of the asset to which it is attached, but a massive liability for lenders.
The existence of negative equity — and the possible reduction of income because of a job loss or reduced hours, or because an investment property cannot pay its way — makes many mortgage holders vulnerable to “persuasion” about giving up their tracker mortgages if they need to restructure the monthly repayments on their loans or look for added time to make the repayments. The banks are said to be showing little mercy in this regard to many borrowers who need help and who, actually, are trying to ensure that they can repay the bank all that is owed. What the bank effectively is looking for is extra.
As bad the banks are, coming up with all sorts of mechanisms to remove tracker mortgages from borrowers, often falling back on the small print of the loan contracts to justify increasing the burden on the borrower. For example, some tracker mortgages were sold to buy-to-let investors on the basis that they would be “reviewed” after five years, a euphemism for changing the terms to suit the lender. For others if the loan had been granted on the basis of a specific debt to equity ratio that has changed now that the value of the property has slumped then a demand to change the interest rate arrangement can be made. If a borrower has missed a single repayment this can be the trigger to remove the tracker.
This matters to an enormous amount of people. Over half of outstanding mortgages are trackers. Almost one in every four mortgages is for a buy-to-let investment property and two-thirds of these are trackers. This suggests that those who have tracker mortgages should hold onto them at all costs. Under codes of protection drawn up last year by the Financial Regulator, under political pressure, banks are not allowed to impose penalties on customers in mortgage arrears; or not allowed to put undue pressure on borrowers by bombarding them with letters and calls demanding repayment; and they are not allowed to force them to surrender tracker mortgages.
The Financial Regulator also has urged lenders to ensure that consumers fully understand the implications of switching from a tracker mortgage. That seems far too soft. The National Consumer Agency has provided a mortgage rate change calculator at www.nca.ie, which is aimed at helping people to work out the consequences of changing their mortgage to a new rate or term, or of making a lump-sum payment. Consumers can use the calculator to work out changes to their monthly repayments if interest rates change, or if they want to change their mortgage interest rate or term. But the advice should be written in large red letters: don’t give up the tracker.
This is one of the major consumer issues relating to the banks at present. In their desperate efforts to recover losses and return to profitability they intend to do whatever it takes — and the regulator is conflicted. The State wants to see its “investment” in the banks recovered and it means that those who deal with the banks will be the ones who provide this money.
They intend increasing charges and fees, and, although they will require regulatory approval to do so, they are likely to get it. They have been upping interest rates on most loans by more than the European Central Bank has been doing. We have all paid to save the banks, as the State has levied extra taxes to meet the costs of recapitalising them. Now we are being required to pay again.
We were told the banks had to be saved with our money as we need a fully functioning bank system. Loans have become extremely difficult to attain, which seems to partly defeat the purpose. It is a subject to which I’ll return at a later because it is crippling many businesses and is contributing to a lack of consumer recovery that would be benefit the domestic economy.
The Last Word with Matt Cooper is broadcast on 100-102 Today FM, Monday to Friday, 4.30pm to 7pm.
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