Thursday 18 July 2019

Report warns ECB rate hike will push young families into arrears

Minister blames 'loss-making' trackers for high mortgage rates - but experts disagree

Picture posed. Thinkstock
Picture posed. Thinkstock
Charlie Weston

Charlie Weston

Homeowners with tracker mortgages and younger borrowers are at risk when the European Central Bank rates rise.

Research from the Economic and Social Research Institute (ESRI) says that any rise in ECB rates would be immediately passed through to those on tracker rates. It points out that younger households, on lower incomes and at an early stage of their mortgage, are most at risk.

The research paper advocates those on tracker rates overpay on their mortgages, if they have spare funds.

It warns those in the at-risk group may find themselves in arrears if rates rise, although this is not expected to happen for a year or two.

Conor O'Toole, ESRI researcher, said the market had recovered considerably from the financial crisis, but "our research points to vulnerabilities for particular groups of households".

Meanwhile, Finance Minister Paschal Donohoe said that "loss-making trackers" were one of the reasons mortgage rates are so high in this country.

Mr Donohoe was commenting on a new report from the Department of Finance that looks at why mortgage rates here are second only to those in Greece.

The Central Bank has repeatedly found that new borrowers here are charged multiples of the rates imposed in the rest of the eurozone.

The Department of Finance research says the reason rates are so high is because any bank operating in Ireland has to hold up to three times the amount of capital reserves against mortgages as the European average.

This is due to the massive mortgage arrears crisis since the crash, and the difficulty for banks repossessing homes, according to a Department of Finance report.

Mr Donohoe also insisted prevalence of what he referred to as "loss-making" trackers on the books of banks was a key reason mortgage rates have not come down further.

"Irish mortgage rates are higher than the European average for a number of reasons, including the fact more than four in every 10 mortgages in this country are still loss-making trackers," he said.

However, experts said banks were no longer losing money on trackers. This is despite the key ECB lending rate for banks being at 0pc.

Banking analyst at Goodbody Stockbrokers Eamonn Hughes said banks were not making a lot of money on trackers - but were generally not losing on them. He said most banks were probably breaking even on them.

Permanent TSB chief executive Jeremy Masding revealed recently the bank's trackers are yielding 1.1pc, contrary to some claims that banks lose money on trackers.

The Department of Finance report also found foreign banks are reluctant to enter the mortgage market here because of stiff regulatory rules on the amount of capital they have to put aside when they issue a home loan.

Mortgage lenders in this market that do not have a banking licence are not required to meet the same criteria on capital provisioning.

These non-bank lenders offer the greatest hope of driving down Irish mortgage rates, the department's report stated.

Non-bank lenders include the likes of Finance Ireland and Dilosk, with An Post also expected to enter the home-loans market.

Irish Independent

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