Monday 20 November 2017

Fixed-rate mortgages would help us all

DURING the boom I remember a financially savvy friend tossing a coin to see whether he should take out a tracker mortgage or a variable mortgage.

Luckily for him, the coin landed the right way and he plumped for a tracker. Like most people who picked trackers, he was lucky rather than far-sighted. How many people could have foreseen what would happen over the next few years?

Today, trackers have gone the way of snuff boxes, VHS tapes and Fianna Fail membership cards.

That means those who want to borrow from the state-controlled banking sector must sign up as second-class citizens and take out variable mortgages that are already crucifying many homeowners and are an accident waiting to happen for new borrowers.

The sad thing is that it would be easy to outlaw trackers and variable mortgages. Fine Gael committed to wholesale reform of the mortgage market when it was looking for votes last year and the party's manifesto contained plenty of good ideas taken from Canada and other countries that survived the debt crisis intact.

One of the central ideas was to reduce the economy's vulnerability to interest-rate hikes. Variable rate mortgages and tracker mortgages are virtually unheard of in many advanced economies where those who want to borrow money must take take out fixed-rate mortgages for the duration of the loan.

In the US, one of the definitions of a sub-prime mortgage is a mortgage with a variable rate -- a definition that makes almost every Irish mortgage sub prime. Some will object that this removes long-cherished choices and they would be right. A change along these lines would probably make it more expensive to hold a mortgage.

Safety always has a cost but at a time when the average taxpayer is expected to pay for the mistakes of lenders and borrowers, the taxpayer also has rights and one of those rights is a mortgage market where risk is reduced as much as possible.

If ever there was an opportunity to change the mortgage market forever, it is now.

The State controls the lenders and few people are borrowing so new legislation forcing people to take out fixed-rate mortgages would affect the minimum number of borrowers.

The benefits to borrowers are obvious; they would know exactly how much they would have to repay every month for decades to come.

Those on trackers may be happy right now but the inevitable hikes in interest rates that will have to follow the European Central Bank's money printing exercise will hurt them badly.

Long-term mortgages that are not affected by interest hikes would go a long way to insulating the individual and the economy from the inevitable rise in interest rates in the years ahead.

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