Making sense of the mortgage market
The row over trackers has changed the way we borrow for homes
The tracker scandal has made mortgages a hot topic. Aligned, and partly because of it, borrowers pay double the interest rates of our European neighbours and are locked into a never-ending cycle of feeling ripped off. This week I'm looking at what happened and how it has affected borrowers' ability to get a mortgage now. What does the market look like these days and how can you make sure you're getting the best deal?
What is the tracker scandal?
During the boom, banks were vying with each other for business, offering 100pc mortgages and almost 'free' money in the form of tracker mortgages borrowed at historically low rates from Europe and passed along to customers desperate to buy houses, at just 0.5pc or 1pc above the base rate.
They locked into these for the term, but banks don't borrow for 20 or 30 years like you or I do - they have to keep re-financing loans. When things went wrong, the trackers became losses as the houses they were borrowed on collapsed in value. But banks had to re-borrow at the original amount and they sought - deliberately, some say - to 'remove' people from their trackers by switching them to variable rates or tracker rates with a much higher margin.
To date, 20,000 such accounts have been uncovered, with more to come.
What's the state of the mortgage market now?
Trackers should never have been sold in the first place. They are a terrible business model and while punters who still have them are (and should) be hanging on to them for dear life, it has left the banks in a perilous position.
They are no longer sold - instead new or switching borrowers must take out standard variable rate (SVR) or fixed rate (FR) mortgages. They will continue to subsidise the remaining trackers which are loss making.
What else is new?
The Central Bank has brought in new rules about deposits and borrowings. Those trading up must have at least 20pc equity or deposit to do so; first time buyers, 10pc. Added to that, a borrower can only get a loan for a maximum of 3.5 times their salary (with strict conditions about what 'salary' means, e.g. overtime, bonuses etc). Although the banks have some leeway on both of these rules, they reserve using it for wealthy or job-guaranteed clients.
How much are interest rates?
The average interest rate on a mortgage is about 3.4pc. That's lower than it was, but double what you'd pay in Germany, France or Italy, mainly due to the subsidisation of trackers.
Should I go variable or fixed?
Traditionally, fixed rates were always a little bit higher to favour the banks who wanted a 'cushion' if rates rose during the fixed period. However, these days rates from Europe are zero, and likely to remain there. So banks are focussing on trying to 'lock in' customers and stop them switching by offering more a attractive fixed rate.
So, for example, Bank of Ireland's SVR for a €200,000 mortgage is 3.9pc, but fixing for five years reduces it to 3.2pc. That's a saving of €72.12 per month, or a whopping €4,327.20 for the term. But do shop around, because rates vary almost monthly.
Aren't there other incentives too?
Too many! First-time buyers are often strapped for cash and see cut-price insurance, free current accounts and cash deals as bargains (see table for a list of the latest 'offers' in this regard), but in truth, they may still be paying over the odds for the term of the loan - if the calculations aren't in your favour before the gimmick, then it's not worth it. A mortgage is the most expensive thing you will ever buy. Always get good advice and check it out.