Wednesday 28 September 2016

Three years of low rates for those with trackers

Published 21/09/2015 | 02:30

ECB HQ: policy of low rates
ECB HQ: policy of low rates
Juliet Tennent, Goodbody stockbrokers

Thousands of families with tracker mortgages are set to benefit as interest rates in the eurozone are to stay at record lows for at least three years.

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But existing homeowners on variable rates are set to continue to suffer from a 'mortgage apartheid', which sees them paying multiples more for their mortgages.

New buyers are being offered cheaper deals, as banks try to lure in profitable first-time buyers, mortgage experts said.

The various rates being charged to different borrowers have effectively created a three-tier mortgage market.

Tracker holders are set for another three years of rock-bottom rates, it has emerged.

Last week, Bank of Ireland wrote to thousands of tracker customers apologising to them for a previous letter suggesting that they might want to move to a fixed rate.

People on trackers have a contract that means their mortgage rate is a set percentage above the European Central Bank rate and can only change when the ECB rate changes.

Most tracker holders pay 1pc about the ECB rate, which is just 0.05pc. This means they are paying only 1.05pc, compared with variable rates that average 4.2pc.

Juliet Tennent, an economist at Goodbody Stockbrokers, said it would be at least three years before the ECB raises rates.

She said this was despite imminent moves to raise official rates in Britain and in the US.

This was because economic growth is sluggish in the eurozone and unemployment is still high. And inflation continues to be muted in 19 countries that use the euro.

Chief economist at Standard Life Investments Jeremy Lawson, in Edinburgh, agreed that there is unlikely to be a rise in eurozone rates until 2018.

There are 375,000 people with tracker mortgages.

The interest rates on these home loans are directly linked to the ECB rate, which is at a record low of close to zero after two further cuts last year, in June and September.

The two cuts last year have meant annual savings of €240 in repayments on a €200,000 tracker mortgage.

The fall of the eurozone rate to just 0.05pc means that monthly payments on such a mortgage are now around €665. Repayments have come down by around €140 a month since 2011.

But the prospects of variable rates coming down further are slim, according financial adviser Michael Dowling of Abacus Financial Services in Dublin.

"Banks have done a certain amount on fixed rates and new loan-to-value rates, but I can seen them changing standard variable rates for existing customers," Mr Dowling said.

Variable-rate mortgages are so much more expensive than trackers, it takes a family almost three months to earn enough to meet the extra cost.

The premium imposed on them is now so high that a family will need to earn an extra €12,500 a year just to cover the difference.

Brendan Burgess of the Fair Mortgage Rates Campaign has called on Finance Minister Michael Noonan to introduce legislation to stop banks excluding existing mortgage customers from good-value rates.

Both Bank of Ireland and KBC offer better deals to new buyers, but do not allow existing customers to avail of the lowest rates.

Irish Independent

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